Four Big Retirement Threats and How to Protect Yourself

By Thomas Walsh, CFP

Four big expenses can wreak havoc with your retirement. Here are our big expenses to consider and how to best prepare for them.

Threat: Premature death of a spouse and resulting loss of Social Security and/or pension income

Going from two Social Security checks to one can cause a significant drop in income. So can the loss of a private pension. Many people don’t consider this.

Solution: Planning, communication and perhaps life insurance

Both spouses should understand how their income is generated and what will happen when one spouse dies. These rules are well-defined. The Social Security Administration provides online tools to assess how your benefits may change due to the death of a spouse.

What if that loss of income would be too great?

Life insurance can be used to make up for the loss of a spouse’s pension income. For younger people, I recommend inexpensive term life insurance. For people past 65, however, cash-value policies such as whole life are usually more affordable in the long run.

Communication is crucial. The financially savvy spouse should routinely update the spouse less familiar with the finances. Maintain a list of all checking, savings, investment and credit card accounts that you own, as well as an estimate of each account balance.

If you use online bill pay, keep a list or computer file with the logins and passwords for each account to avoid late payment penalties and missed payments.

Keep a file for your important documents like insurance policies, wills and powers-of-attorney. Introduce your spouse to any of your professional advisers, including your financial adviser, tax preparer, attorney and insurance agent. These will likely be some of the first people your spouse contacts after you die, so it will be helpful if you’ve already made the introduction.

Threat: Health care costs

Medicare plans, including Medigap and Medicare Advantage, typically don’t cover most long-term care, dentistry, vision care, hearing aids, eyeglasses or private nursing. Prescription drug coverage has a donut hole, so if you need expensive drugs, you could pay up to $5,000 annually.

If you face a major medical issue or need long-term care, you may have to spend your savings at a much faster pace than you expected. I’ve seen many clients unintentionally lowball their estimated medical costs in retirement because they’re in perfect health at age 55. But health can change quickly, especially in old age.

Medical cost inflation usually far outstrips regular inflation.

Solution: Save in an HSA or another tax-advantaged account if you’re not HSA eligible

A Health Savings Account is a great way to save for future medical expenses because you get a tax deduction for your contributions but don’t pay income tax on withdrawals for qualified medical expenses.

To qualify for an HSA, you must have a high-deductible health plan and can’t be on Medicare. The minimum annual deductible is $1,300 for self-only coverage and $2,600 for family coverage.

Most often, an HSA is part of your employer’s health care package. But any qualifying individual can open an HSA. Some banks and insurers offer them.

If you can’t open an HSA, tax-advantaged retirement plans like IRAs, Roth IRAs and 401(k)s are generally the next best place to turn for saving for future health care costs.

Be skeptical of long-term-care insurance coverage. It’s often costly and the insurer has a high risk of being unable to fund future claims.

To keep up with rising health care costs, you should maintain a diversified investment portfolio with at least some exposure to a diversified set of equity investments.

Threat: Inflation

Inflation has averaged about 4 percent annually during the past 50 years, according to data provided by the U.S. Bureau of Labor Statistics. At that clip, $1 today would only buy you 46 cents worth of goods in 20 years!

Solution: Protect against inflation with a thoroughly diversified investment portfolio

When saving for retirement, invest a portion of your portfolio in stock mutual funds and exchange-traded funds (ETFs). The right percentage varies with each individual’s risk tolerance.

You’ll probably want to ease up on equities during retirement, but don’t abandon them. Being too conservative with your investments during retirement is a mistake. If you have all of your savings in low-yielding investments like bonds or CDs, it will be difficult to keep up with inflation.

Equities offer higher long-term returns but are more volatile year to year. You can manage this risk by maintaining a diversified asset allocation that includes U.S. large-capitalization, U.S. small-cap, international, natural resources and real estate investments. By building your portfolio with mutual funds and ETFs, you can easily own thousands of individual securities across multiple asset classes.

Threat: Outliving your savings

Your chances of living longer increase as you age. For example, according to the Internal Revenue Service’s life expectancy tables, a 30-year-old is expected to live to age 83. However, if you are 65 years old today, you can expect to live until age 86.

Solution: Periodic planning

Make sure to periodically review your life expectancy using a table from a reputable source like the IRS. The effectiveness of your retirement plan is only as good as the assumptions going into it. Don’t shortchange your retirement by underestimating just how long you could live.

Hopefully, you’ll live happily to a very old age. Give yourself some cushion and save and invest with that in mind.

Thomas Walsh, Certified Financial Planner (CFP®), is a client service and portfolio manager with Palisades Hudson Financial Group in Atlanta who advises pre-retirees and retirees.

Palisades Hudson Financial Group is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at www.palisadeshudson.com.