This morning, I read an interesting article about retirees becoming increasingly concerned about their ability to have enough money to cover basic living expenses. One of the major reasons for this is the increase in medical and long-term care expenses. Retirees faced a steep increase in the standard premium for Medicare Part B, which pays for doctor visits and other types of outpatient care.
According to the article, 44% of retirees said their health care expenses are higher than they had expected when they first retired. About 25% said the same about long-term care costs. Only 46% of people surveyed said that they were very or somewhat confident that their Medicare benefits won’t be cut.
It isn’t just retirees that are feeling the pressure, as only 64% of workers said they are somewhat or very confident in their retirement prospects. This number is down from 70% in 2007, before the Great Recession. 79% of workers plan to work for pay in retirement, however, just 34% of retirees said they had actually done so.
One thing that is worrisome about these figures is that this is where things are in year-9 of a bull market and overall economic recovery. We must expect a recession and realistically a bear market in the next 3-5 years, or sooner. Heck we have already seen a correction this year, when market pundits were overwhelmingly bullish. Clearly, that pressures things further and creates additional stress.
As you approach retirement, it is important to have a plan. If your goal is to work part-time, then have a clear of understanding about the types of jobs that you plan on doing. Some clients have focused on managing rental properties. Other have taken advantage of the gig economy and have done things such as drive for Uber and Lyft. Others engage in consulting projects or starting a new business. Some people take a more active role in their church or become more actively engaged with children and grandchildren. One thing that just about all of these people have in common is that they derive satisfaction from the activity of keeping busy. It sounds great drinking margaritas on a beach somewhere, but after a few months, one tends to need additional stimulation.
“As you approach retirement, it is important to have a plan.”
For younger clients, the focus has to be on saving money so that you can invest for the longest time possible. This means keeping expenses in line and investing in your financial future by foregoing current pleasures for future financial security. One of the things that I’ve found and seen to be helpful is setting up recurring monthly deposits to my investment accounts. This is money that I don’t even think about spending or feel like I even have the option to and doing this on a regular basis allows one to dollar-cost average over a very long time period. I also will do everything in my power to maximize contributions to things such as IRAs or 401ks. For those that are lucky enough to have an employer match, take advantage of the perk!
Another major mistake is to allow yourself to maintain credit card balances. Credit card interest rates are sky high and the power of compounding working against you can cripple you financially. My wife and I attend a church couples’ small group, and I was chatting over the weekend with the other couples who are about our age or a little younger, about how important it is to invest, as opposed to holding too large of a cash balances. Inflation eats away at your purchasing power, so it is important to keep your money working for you in an intelligent manner. If you have a certain cash need in 3 months, then don’t expose yourself to too much risk, but if you have a steady job, it works against you to not allow your money to work for you instead of just you for it.
This doesn’t mean that you will make money every year through investing of course as nobody does that. Instead it means, that you are allowing time to work in your favor and you are creating the opportunity for a fruitful retirement. Higher interest rates would ultimately create greater opportunities for fixed income investments, but also increase the opportunity cost of staying strictly in cash. Student loans are another major issue so make sure to go over the numbers with your children before picking a college. Children are often not properly educated on the true costs of incurring substantial student debt in school, which often carries relatively high interest rates, so it is up to us as parents to make them aware. Often unscrupulous school counselors will attempt to assuage concerns by saying that payments can be deferred, but fees are racking up the whole time.
One of our clients recently remarked on social media how he has been paying down student debt for nearly 20 years, but his balance barely seems to budge. That is because that interest is constantly working against you, unless you are making major reductions to principal.
“That is because that interest is constantly working against you, unless you are making major reductions to principal.”
One last thing I’ll talk about is real estate. When you are buying, your home, I wouldn’t necessarily think about it in the same manner as your other investments. If your home hopefully appreciates in value over time and you sell, usually the property that you are switching into has also appreciated in value. If you are downsizing maybe in retirement, this can result in quite a windfall, but usually if your family is growing, you are buying a more expensive home each time. The good thing about investments such as equities is that you can take advantage of areas that are out of favor and cheap, while holding them until they appreciate in value as the situation normalizes. You can do the same thing with true investment properties, but usually what people do with their own homes doesn’t meet this definition of investment discipline.
As always, we are available to chat anytime if you have any questions or thoughts. While the prospect or reality of retirement can cause anxiety, the best way to find resolution is to truly address the issues. Even if it means making painful reductions in spending or foregoing that cruise to the Bahamas, there is something cathartic about taking as much control of your life as you can. Below is a link to the WSJ article and for those of you that aren’t subscribers to the magazine, I covered most of the salient points made in it.
Thank you all very much for your business and the great relationships we have built over the years, as it is not something that we take for granted at TTCM.