Three Tactics to Address Your Retirement Worry of Running Out of Money
No matter your age or wealth, when you step into retirement there’s one overarching concern that most people have: running out of money.
The rate of retirements and early retirements rose over the past two years. Early retirements, or those that occur before age 64, increased through the pandemic, as did retirements from those of traditional age, between 65 to 74.1 With more people retiring earlier than expected during the pandemic, it’s important to address this worry of running out of money to ensure it doesn’t become a reality.
Whether a retirement is planned or comes about due to an unforeseen circumstance such as for health reasons or a job loss, focus your planning to ensure you have enough funds to support you the rest of your life. By doing so, you can have a much more secure retirement, allowing you to better enjoy the fruits of your labor. Address the following three key issues in the planning process.
Craft a healthcare plan
Your biggest expense to plan for in retirement will most likely be healthcare. The average retiree (one retiring at 65) will need $325,000 earmarked for healthcare, according to the Employee Benefit Research Institute.2 This grows larger for early retirees, since they’re often losing their employer plan by stepping away.
First step: make sure you purchase a health plan. Whether this is by going directly to an insurer, finding one through the open market plans available or by applying for Medicare (for those 65 and over), having a plan helps protect you from a huge financial expense due to an unexpected medical bill.
For those with Medicare, make sure to also plan for supplemental health insurance or a Medigap plan. This can help pay for deductibles or payments that your Medicare plan won’t cover. Another option is a Medicare Advantage plan, which pays for medical expenses and possibly provides dental and vision coverage.
For those that had the opportunity to save in a health savings account (HSA) while working, then this can become an advantage to help pay for health costs in retirement. Since you don’t pay taxes on the HSA when contributing, nor do you pay taxes as the account grows, it provides a powerful tool to accumulate funds.
Also, if you use the account for qualified medical expenses, then you don’t have to pay taxes upon distribution. HSAs are considered triple-taxed advantaged, due to these features.
Medical insurance counts as a qualified medical expense, allowing you to pay for the cost via a HSA, tax free.
Plan your long-term care now
The tricky thing about the fear of running out of money in retirement is that when you’re most likely to run out – later in life – you have the least amount of flexibility to solve the concern. That’s particularly true with long-term care, like in-home or nursing home care. By the time you use these services, you can’t go back to work and it’s difficult to build more wealth.
Complicating this factor are the high costs of the care. In-home care services reach $53,000 a year, on average. For a single room in nursing home, costs typically run about $105,000 a year. These amounts will vary widely depending on what state you live in and the individual home you select.3
How do you fund this expense? There are typically three ways:
- Fund it yourself – You’ll pay for the costs out of pocket, using your retirement savings. It can also fall on your family to pay for these expenses if you run out of funds, which most people seek to avoid.
- Use government resources – This will limit your options in the type of services and providers you have access to.
- Buy long-term care insurance – Look at this when you’re in your 50s or early 60s, since the cost will be far less than for those looking for insurance later in life.
You’ll likely want to use a combination of these strategies – it’s common to use both self-funding and long-term care insurance, for example. If you prepare now, though, then you’ll have peace of mind if the need for care arises in the future.
Build a consistent income stream
In a best-case scenario, your investments in the market will grow and you never have to worry about volatility. Of course, that’s not always the case when it comes to investing. If the market turns downward, and you pull money out, you’re selling at a discount and selling more of the total shares you own. This reduces the ability for the portfolio to bounce back and grow.
To counter this, it’s ideal to have a set amount coming to you to cover your costs. This is particularly effective in your later years since many of your costs are fixed or similar month after month. Health care or long-term care will make up a large percentage of your variable costs or those that change each month or year. To have a stream that will cover the fixed costs, no matter what happens in the market, will help ease the risk of market volatility.
For some retirees today, they may have a pension that helps cover this portion. For others without a pension, consider an annuity to provide coverage.
Having a lifetime annuity that covers a certain amount each month for the rest of your life can ensure your finances aren’t hampered if the market moves downward. It adds a secure safety net, reducing your concerns over money and allowing you to focus your energy on enjoying your retirement.