Americans are living longer, and that means a higher chance of requiring long-term care. Retirement is a major milestone that brings many life changes. One thing that doesn’t change for most people: the fear of running out of money. According to the Transamerica Center for Retirement Studies, “the most frequently reported retirement worry is outliving savings and investments. Across all ages, 51% of respondents cited this concern, and 41% of retirees claim the same fear. Additionally, only 46% of retirees think they’ve built a nest egg large enough to last through retirement.”  Here are five reasons we believe clients dangerously deplete their retirement savings: 
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1.     Taking too much from your retirement savings.  In fact, according to the Employee Benefit Research Institute, nearly 46% of retired households spent more annually in their first two years of retirement than they did just before retiring. There have been numerous studies on the topic of sustainable withdrawal rates from retirement portfolios and the range has usually been in the 3-4.5% of the account value.  If we imagine your savings is the goose that’s laying the eggs, putting too much pressure on the goose over time will result in smaller eggs and possibly at some point, she could stop laying the eggs.

2.     Improperly diversified Portfolios. In the 27 years I’ve been helping clients through their retirement years, when well diversified, I personally have not seen anyone lose all their funds due solely to a down stock market. Many pre and post retirees are under the assumption that once retired, they need to abandon stocks or equities in general to help preserve their portfolio from down drafts in the market.   The latest JP Morgan Capital updates state that  due to the negative impact of inflation over time on your purchasing power, your retirement savings need to grow 2-3% above the distribution rate you’re taking from your accounts.  If you’re withdrawing 4%, you would need a total return of 6-7% to maintain the income and effects of inflation over time.   Having a portfolio too aggressively postured can also pose problems, diversification among multiple asset classes can help reduce volatility.

3.     Depending on a single source of income. Social Security is the primary source of income for 61% of retirees, according to the Transamerica Center for Retirement Studies. Additionally, they report 44% of retirees state that one of their biggest financial fears is Social Security will be reduced or cease to exist in the future. Based on current projections by Transamerica Center for Retirement Studies, Social Security will only be able to pay 77% of promised retirement benefits beginning in 2035.  Since Pension income is rarely offered by an increasing number of employers, most retirees may have to rely on their retirement savings such as IRAs and 401(k) and Social Security as only a safety net.

4.     Bailing out Family Members Financially.  Several times, we’ve seen parents succumb to irresponsible children in providing a carte blanche bail out of funds to overly dependent offspring who have made bad choices in life.  You may feel obligated to assist your children financially—paying for college, contributing to the down payment for a first home and covering them in emergencies, for example. But doing so at the expense of your retirement security may cause bigger problems for both you and your kids in the long run. There is a difference in supporting them in medical, family or other situations requiring financial assistance vs. enabling bad behavior. 

5.     Health Care Expenses.   According to a 2015 report from the Employee Benefit Research Institute, “a 65-year-old man would need to save $68,000 to have a 50% chance of affording his health-care expenses in retirement (excluding long-term care) that aren’t covered by Medicare or private insurance. To have a 90% chance, the same man would need to save $124,000. The news is worse for a 65-year-old woman, who would need to save $89,000 and $140,000, respectively.”  * Be sure you’re doing all you can to cut health-care costs in retirement by considering supplemental medigap and Medicare Advantage plans and reviewing your options every year.  Long term care insurance can help you plan for the unexpected and preserve your financial legacy. 

Long-term care bumps up the bill even more.  Long-term care provides medical and personal care for people of all ages who can’t independently perform basic daily living activities, such as bathing, dressing, eating and getting around, due to illness, injury or cognitive dis­order. Care is available in a number of settings, including private homes, assisted-living facilities, adult daycare centers, hospices and nursing homes.  For example, the median cost for adult day health care in the U.S. is $1,473 a month; for a private room in a nursing home, it costs a median of $7,698 a month, according to Genworth. No wonder 44% of retirees fear declining health that requires long-term care and 31% fear cognitive decline, dementia and Alzheimer’s disease. Consider getting long-term-care insurance to help cover those costs.   You can’t know for sure if you’ll need long-term care or for how long, but you can plan for the possibility that you’ll one day need expensive long-term assistance if health problems result in a loss of independence. Studies suggest that almost 70% of those over age 65 will need some type of long-term care for three years, and 20% will need care for more than five years. More than two-thirds of those needing care will require nursing home services. But Medicare does not cover long-term care, and nursing home care averaged $82,125 a year in 2015. A home health aide is expensive as well; in fact, hiring one can cost as much as $21 an hour, more than $500 a day for round-the-clock care.1 
 
The chances of needing that level of care increase as we age. Having a plan in place may help you feel more confident in retirement, offering reassurance knowing you’re better able to manage your financial situation and access quality care, if and when you need it. It makes sense to mitigate some of the financial risks through adequate long-term care insurance to avoid this potentially financially – and emotionally – devastating scenario.

1 Genworth 2016 Cost of Care Survey

Any opinions are those of Thomas Fleishel and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss. Past Performance does not guarantee future results. Diversification does not ensure a profit or guarantee against a loss. Guarantees are based on the claims paying ability of the issuing company. Long Term Care Insurance or Asset based Long Term Care Insurance Products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made prior to age 59 ½, may be subject to a 10% federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.
This is a hypothetical example for illustration purposes only.  Investments mentioned may not be suitable for all investors.  

* This is a hypothetical example for illustration purposes only.  Investments mentioned may not be suitable for all investors.