The Challenges of Retirement

In a recent North American survey by Allianz Life, more than 3 of 5 people between the ages of 44 and 75 said they worry more about running out of assets than about dying. Funding a 30 year retirement will take financial planning prowess as you juggle the effects of longevity, inflation, healthcare costs, taxes, market volatility, and regular living expenditures.
Your retirement could last longer than you think. Since 1950, life expectancies have increased by more than 10 years ( According to estimates, if you are 65 and married, there is a 50 percent chance that either you or your spouse will live to age 92 (US 2000 Mortality Table). So how long are you going to live? Today there is a higher probability that you’ll live much longer than your parents or grandparents. Longevity is perhaps the greatest challenge for those considering retirement. Most boomers seriously underestimate their life expectancy. You must realize that if you are middle class and have good health care, you will likely live beyond the average life expectancy. Last year, Hallmark sold 850,000 “Happy 100th Birthday” cards! The latest estimate from the Census Bureau forecasts 1.1 centenarians by the year 2050. Can you afford to live to age 100?

Keeping up with increasing expenses
Prices for basic expenses (food, housing, transportation, utilities, etc) tend to increase over time. But most of us underestimate the impact these costs can have on our standard of living in retirement. Inflation rates have varied historically but, even at modest rates, inflation can diminish your purchasing power in retirement by 50 percent in 20 years. In 30 years, at just 3 percent annual inflation (average), a person initially retiring with $50,000 of annual income would need $121,363 in retirement income to keep pace with inflation.

Healthcare costs
In addition to basic expenses, the cost of healthcare is the biggest financial challenge facing Americans today. Workers now pay 47 percent more than they did in 2005 for family healthcare coverage, while their wages have increased only 15 percent (Kaiser survey of Employer Health Benefits 2010). Healthcare costs in retirement will be even bigger as health issues arise. It is estimated that an average, healthy 65 year old couple will need $260,000 out of pocket to pay for their healthcare costs before they die (2010 Center for Retirement Research at Boston College).

Will I pay lower taxes in retirement?
Just because you are not working for wages, doesn’t mean you will be in a lower tax bracket. Think about all of your sources of income in retirement: IRAs, pensions, investment or real estate income – even social security – are all taxed as ordinary income. You could actually be in a higher tax bracket in retirement. In addition, a soaring federal deficit will imply that federal tax brackets will move higher to afford all the social welfare programs the government has promised. The deficits may also have significant negative influence on state and local taxes if government subsidies are reduced (The Tax Foundation, March 2010). It is no wonder 16 percent of seniors live below the poverty line in America. This may become a much higher percentage in the future if federal programs and support are cut.

Although all of this data can be depressing and discouraging, it does cause us to be sober minded and serious about all our financial decisions and disciplines. Planning your future in a way that pleases God involves faith (Hebrews 11:6), not fear (Psalm 23:4, 91:5). It also involves wisdom, so we must become knowledgeable, stay informed, practice discipline, and faithfully carry out the duties of a steward. “By wisdom a house is built and by understanding it is established, and by knowledge the rooms are filled with riches” (Proverbs 24:3-4).

Jeffery Masters, President of Jeffery W. Masters & Associates
Securities offered through LPL Financial, member FINRA/SIPC
Investment Advise offered through Independent Financial Partners,
a Registered Investment Advisor. Independent Financial Partners and Jeffery W. Masters
& Associates are not affiliated with LPL Financial.
Jeff is a Locally Endorsed Investment Advisor by Dave Ramsey. Email Jeff at: [email protected].

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