If you stop for a minute and think about what the worst part of running out of money actually is, what do you think it would be? Do you think deep depression would hit you at the exact moment your savings become totally exhausted, or would it hit you leading up to that day? In my opinion, the worst part of running out of money would be the moment you realize that your retirement savings are going to run out, and that is because from that point forward, you will have many months or more likely, years of worry to follow.
I’ve spoken with enough prospective and existing clients to know that running out of money, or the fear of realizing you may run out, is the most common concern about retirement there is. But what is it specifically that’s causing this anxiety among so many Baby Boomers? Some would argue, as I have in the past, that it’s the potential of having to pay for high long-term care expenses. After all, many of you have personally witnessed a family member, most likely your own mother or father, suffer through debilitating physical or mental conditions that required some degree of long-term care.
But is it the thought of paying long-term care bills that causes so many Baby Boomers to live with some (or a high) degree of anxiety about money during retirement? I think it goes deeper than that. In my opinion, although long-term care is the reason cited most often for retirement anxiety, it’s really the unsettling thought of not knowing if you will run out of money, and therefore forcing a decline in your standard of living at some point, that makes so many of you uneasy. You may even have guaranteed annuities for the rest of your life in the form of an employer pension, a private pension from an insurance company, or Social Security benefits, but you still may not be sure if it’s enough if you get hit with a financial tsunami. It’s merely the thought of the unknown that causes so many of you to live a “just in case” retirement.
Imagine you’re retired and would love to finally take your dream vacation, but instead you decide against it or choose to scale back on the cost “just in case” you need those extra dollars later in life. Or you’ve been eyeballing a new boat for years now so that you can host more friends and family during the summertime, but on second thought, you better not pull the trigger “just in case” the stock market falls like it did back in 2008 and 2009. Instead of enjoying the money that has been deferred until retirement, so many Baby Boomers hold back out of fear of the not knowing what the future has in store for them 20 or 30 years down the road (with the most concerning of the “unknowns” being long-term care costs). Being frugal and defensive with your savings, especially during retirement, is understandable but what often happens is when a retiree goes on the defensive and doesn’t enjoy the money he or she saved, the kids or other family members wind up taking big vacations or buying their own dream boat. Clients and those of you that have attended our workshops often hear me say to fly first class because if you don’t, your kids will! This is advice I would strongly consider! After all, what good is money if you’re too afraid to spend it? If you’re worried about leaving money for the kids, just buy a life insurance policy and get on with your life. Case closed.
There are plenty of reasons to be defensive with your retirement savings since there are a lot of things that pose a threat. Issues like inflation, stock market losses, rising interest rates, falling interest rates, long-term care expenses, income taxes, theft, poor investment decisions, and outliving your money have to be closely guarded against. While these are all ongoing threats to your retirement security that require constant vigilance, the issue of longevity is the most threatening and serious of them all and that’s because it is a risk magnifier. In other words, the longer you live, the more you are exposed to stock market losses, rising interest rates, falling interest rates, long-term care expenses, income taxes, theft, poor investment decisions, and outliving your money. These issues are also interconnected so for example, to offset inflation means you’ll likely have more stock market risk since that’s where most investors invest their money to potentially offset the effects of inflation. The longer you are in the stock market, the longer you are exposed to crashes and panics. As you age, it’s likely your mental faculties will diminish which expose you to creditors and predators for a longer time.
Longevity, in my opinion, is the most serious threat to your retirement and it needs to be guarded against at all costs since it magnifies all of the threats listed above.
So what can you do to guard your savings from all of these different issues so that you don’t have to live a “just in case” retirement? Of course, it will depend on your individual circumstances, but the first thing to realize is there are some risks that you simply cannot eliminate; you can only manage them and reduce your exposure. For example, you cannot eliminate the chance of dying but you can significantly reduce the chance of leaving your family financially vulnerable by buying the right type and amount of life insurance. You can’t eliminate the risk associated with investing, but you can reduce the risk of losing a lot of your principal by using sell-stops, options strategies, and diversifying among a broad range of assets.
When it comes to the most dangerous of all risks – longevity – the most important thing to do is to ensure you have the proper safeguards in place. For starters, you need to strongly consider buying long-term care insurance since the longer you live, the more likely it is that you will need some type of care. Additionally, with 10,000 Baby Boomers retiring every single day over the coming decade, there will be a huge strain on long-term care services. Unless the supply of facilities and caretakers keep up with the demand, you can reasonably expect costs to continue rising just as they have been. The knock against traditional long-term care insurance is that if you don’t use it, you lose it. But as I point out in this post, savvy Baby Boomers buy life insurance with a long-term care rider attached to it. This allows the insured to use their policy’s death benefit as a living benefit to pay for expensive long-term care. If they never wind up using their policy for long-term care benefits, their family gets the death payout which means they get all of the premiums that were paid refunded right back to them. The savviest of Boomers will shave off just a pinch of their investment earnings to pay for this type of policy. The end result is they aren’t held down to living a “just in case” retirement and they’re able to actually spend their savings with a lot less worry. A LOT less worry.
Another way to make sure you don’t live a “just in case” retirement is to have a guaranteed source or sources of income that will last until your death and the death of your spouse. As I mentioned, most of you already have guaranteed annuities in the form of an employer pension, Social Security and a private pension through an insurance company. That is an ideal position to be in provided you have enough income to cover your basic living expenses. Of course, you are still subject to inflation risk as most types of pensions don’t grow at a compounded rate. Even if they do, such as many police and fire pensions, the payout formula can be changed if the economy takes another nosedive. It’s just something to keep a close eye on. With that said, it’s possible to structure your investments so that you give yourself a paycheck every single month, whether the stock market is up or down so that you know your basic (and not so basic) living expenses are at least covered. You can even go a step further and make sure that you have a guaranteed amount of income rolling in to pay for all of your trips and hobbies.
In conclusion, the bottom line when it comes to your retirement years is they should be spent with the least amount of worry about your finances as possible. It’s entirely possible that you are living a “just in case” retirement because of the fear of running out of money during retirement, but it certainly doesn’t have to be that way. Ask yourself why you sacrificed and saved money all of those years. Was it so that the kids and the government can reap the benefits of your hard work, or was it so you could do the things you always dreamed about but had to hold off until later in life? If you’re still holding off on following through on your passions, it’s probably because you’re afraid to spend a good part of your retirement savings, just in case you live too long or get hit with huge expenses like long-term care somewhere down the line. When you have the proper safeguards in place, you significantly reduce your chances of running out of money during retirement and you can then enjoy the fruits of your labor without worrying so much about what tomorrow may bring.