Since I decided to address several topics in this post, let’s break it down by retirement risk.
Inflation:
If you read my post from last week, I noted that the national average for inflation as of mid-July was over 9% annually. But is that your personal rate of inflation, and are there ways to ensure your personal rate of inflation is less than 9%? It depends on your spending habits during inflationary periods. Of course, there will be impacts as inflation impacts every facet of your life, including groceries (up about 12%), gasoline (up almost 50%), utilities (up 12%), dining out (up 9%), new cars (up almost 13%), new homes (a whooping 20%), hotels (over 19% increase), and the list goes on.¹
Making slight tweaks in your spending habits can lower the impact of inflation on your disposable income. Such as traveling at less popular times of the week and day and to less sought out destinations. You might be surprised at what you discover about a new travel destination. Or have a very funny story to tell your children and grandchildren!!.. Using membership cards to save on gasoline and even coordinating trips and errands so you are using gasoline more efficiently. If possible, hold off on purchasing a new or used automobile till the prices start trending downward. Planning your weekly meals around the grocery sales of the week and stocking up on nonperishables when they are on sale. Dining out less and eating at home more will also reduce the inflationary impact on your disposable income. Remember, inflation will come and go with time. What we do not know is how long inflation is here to stay….
As for financial planning, the best estimate for inflation is historical averages, which is currently tracking over 3%. But that is why it is necessary to prepare a financial plan and track that financial plan from year to year. Is there much in your life that you don’t keep tabs on at least once a year?
Think about your annual wellness checkup with your doctor. What about your auto tune-up at least once per year? As for home repairs, seems like there is always something requiring your attention. So why wouldn’t you do the same for your financial plan, especially if you are approaching or in retirement where 3% may be too low of an estimate for inflation.
Market Returns:
What about average market returns? From 2012 through 2021, the average stock market return was 14.8%. Also of note, the stock market has returned an average of 10% per year over the past 50 years.² Can you expect to receive an average 10% annual return going forward? Maybe not. There is no way to predict market returns…
Financial plans do use averages and typically your financial advisor invests your retirement accounts in portfolios to achieve those average returns. But there is too much market volatility to guarantee returns no matter the level of financial planning. Again, another reason to revisit your financial plan at least once each year. Be prepared! There are other ways to be prepared for market downturns, possibly recessions, outside of the assets in your retirement accounts. But that is a topic for another day.
Now if you are approaching or in the early years of your retirement, it is crucial for you to throw out average returns and only look at actual returns. If the actual returns are negative while you are withdrawing money from your retirement accounts and negative daily returns turn into negative monthly returns and possibly year over year negative annual returns, that is a guaranteed way to eat up your retirement assets quickly. Ask those who retired in 2008…
Withdrawal Rates:
Experts have been reporting for years that the average ‘safe’ withdrawal rate from your retirement accounts is 4% annually. Until recently…. Due to stock market volatility in addition to current inflation along with pending tax rate hikes, that ‘safe’ withdrawal rate is now as low as 2.8% annually. Let’s not even discuss whether 2.8% annually is enough to cover your daily living expenses…
No matter the percentage, does that mean you can withdraw the same percentage year over year? Not quite. In years of negative actual returns, you want to have a backup plan to ensure you are not selling your retirement assets during a market downturn while withdrawing money from those accounts. As I mentioned above, quick way to run out of money in retirement.
How much you can withdraw from your retirement accounts annually should be dependent on not only your cash flow needs but also the actual market return for the year. Again, having a backup plan to ensure you are not selling off investments to meet cash flow needs during a market downturn is a must. That is where financial planning comes in handy. By way of financial planning, you can setup your retirement accounts for success by having alternative sources other than your retirement assets accessible during market downturns, which could be as simple as having a year’s worth of cash reserves to fund your cash flow needs. There are simple steps you can take to avoid running out of money in retirement. But that requires financial planning now as the market can take a negative turn at any moment, and it could take several years for it to recover. It took over 4 years for the market to recover from the Great Recession of 2008…
Long-Term Care Costs:
Did you know that the average long-term care costs for a senior over his or her lifetime is $315,000, up from $300,000 a year ago? What are the chances that the senior who has been in a skilled nursing facility for over a decade has spent more than $315,000? Very likely.
Let’s look at a few statistics to clarify the problem with averages. The largest claim for an insurance company for long-term care for a male was 14 years, 2 months and the total cost to the insurance company was $2,276,381. For a female, the largest claim was for 16 years, 6 months for a total cost of $2,329,333.³ And that was reported through 2018. Do you have that much money sitting aside for long-term care costs?
As another consideration, the costs for long-term care vary by state as one state can be more expensive than another state for nursing and assisted-living facilities and home health aide.
Potential costs for long-term care must be factored into your financial plan. As medical costs continue to climb at a pace that exceeds the inflation rate on goods and services, and insurance companies are constantly making changes to long-term care policies to not only make them affordable for you but to also protect them from bankruptcy, it is best to have a plan AND a backup plan for long-term care costs.
How do you know if you need to be worried about long-term care costs? Consider your current medical conditions in addition to the medical conditions of both parents and grandparents. Factor in costs and time spent in long-term care facilities by family members. Outside of family history, if you are concerned about long-term care, then you should consider your options for coverage.
Don’t wait till the last minute for coverage as it can be quite expensive and harder to qualify for coverage the older you are when you obtain coverage. Again, stay on top of changes by way of financial planning and be prepared!
Conclusion:
The financial planning process is not a once and done process. And the best way to demonstrate your trajectory into and in retirement is using historical averages as no one can predict the future. But you can be prepared for the future with financial planning. With the rate of changes we are experiencing these days and the magnitude of those changes, it is best for you fine tune your financial plan on an annual basis, whether you do it yourself or have a financial planner assist you with the process.
Resources:
1. Kiplinger, “What is Your ‘Personal Inflation Rate’?, by: Doug Kinsey, CFP, CIMA, June 22, 2022
2. The Motley Fool, “Average Stock Market Return”, by Mike Price, July 8, 2022
3.Long-term care insurance statistics data facts 2019 (aaltci.org)
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