Retirement: The land of hopes and dreams and peace and quiet and blissful adventures, right? For the Baby Boomer generation, retirement marks a turning point in one’s personal and financial life. Since there are 78 million Boomers, I believe it’s also safe to say that we’re at a turning point in our nation as well.
If you’ve been wise and chosen to work with a financial advisor to develop a retirement income plan, I’m hoping that you’ve done some foundational work long before your final month of employment. I say this because you likely entered the retirement red zone 4 or 5 years ago. If you haven’t been working with a financial planner, I suggest you begin looking for someone you can trust to work with you over the next 30 years.
“30 Years!? I won’t live that long,” you say.
Unfortunately, math and science disagree with you if you are healthy. A recent Gallup poll from 2014 showed that the average age of retirement in the United States was 62 years old, and the Society of Actuaries just increased life expectancy to 88.8 years if you’re female and 86.4 if you’re male. Even more startling is that the life expectancy of a married couple (the age reached by the last surviving spouse) is over 90. With our increasing advances in medical care, I always tell my clients, “You can tell me that you’re not going to be here, but we’re going to plan as if you will be.”
Now that we’ve established that retirement is likely a longer time period that you expected, let’s take a look at some challenges that may threaten your ability to enjoy your golden years.
That’s right, I said it. One trend that’s becoming more and more common is adult children who are still on mom and dad’s payroll. Don’t get me wrong, I know that sometimes people just need a little help. Unfortunately, that help is turning into adult welfare, and it’s beginning earlier than you’d expect.
Parents today are now co-signing student loans out of love for their children, yet failing to realize they just became debtor of last resort for the lender. If your child can’t make the payments, guess who’s name is on the loan documents?
Another, even more disturbing trend, is seeing full-grown adults take advantage of an aging parent. This situation can arise when kids believe they are entitled to some of their parent’s money because “it’s going to be mine one day anyway.” I have a good friend of mine who was telling me about an adult son who attended every advisory meeting with his parents, who were in perfect health, to instruct the advisor about what to do with their assets. Mom and Dad were just wallflowers as their son directed their financial matters—even going so far to say that the assets were eventually his, so he was calling the shots. Unbelievable, I know—but it happens.
This is becoming an X-factor for many retirees because it’s so difficult estimate. Advances in healthcare are revolutionizing care and treatment for today’s generations, yet the costs of receiving care is continuing to rise. More and more Boomers are moving onto Medicare, another social program that faces funding challenges in the future. In my opinion, it’s not unrealistic to expect increased medicare premiums during one’s retirement years, along with increased out of pocket costs due to physicians not accepting low medicare payments.
In addition, I must mention Long Term Care. I often encounter two main types of clients when it comes to the long-term care discussion: clients who view it as “nursing home insurance” and a waste of money OR clients who have been caregivers for aging parents that make LTC a top priority. As we are living longer, we are facing increasing challenges with mental capacity. Dementia and Alzheimer’s are now the #1 cause of long-term care expenses with nearly 25% the cases coming from a capacity issue, not a physical one.*
*I must note here that it is widely known and discussed in the long-term care community that the majority of long-term care is done by family caregivers in the home. Therefore, the true cost and impact of long-term care needs in the US likely much greater than reported.
When I was researching for this post, I found the idea of divorce to be a bit far-fetched for retirees. However, according to the article “The Gray Divorce Revolution” by Susan Brown and I-Fen Lin of Bowling Green University, approximately 1 out of 4 divorces in 2010 happened in couples over age 50.
There are numerous ideas about why this trend is developing—some say that children leaving the home allows for dysfunctional relationships to reveal themselves after being suppressed during the years of raising children together. Other couples that have financial means but different visions will often consider that a 50/50 split of the assets can allow them both to pursue their own endeavors during retirement. If financial conversations are particularly divisive for some couples, they need to find a way to compromise and discuss financial matters in a productive manner so that can diffuse the ticking time bomb that money matters can create.
I was quite tempted to move this to the top of the list—mostly because I see this desire in my younger retirees more than my older clients. It’s even more common in clients who haven’t retired yet because they don’t understand how retirement income distribution works.
As I have mentioned before, retirement is different from your working years because all of the rules change. At our financial workshops, I ask participants to name the top risks people in retirement will face, and I ALWAYS get an answer that sounds like “market risk, stock market crash, etc.” Lately, though, we are seeing more and more responses that refer to longevity or outliving one’s assets.
One of the major reasons why overspending is a concern for retirees is that they’ve been conditioned to save and invest, and now that they are retired, they don’t know what to expect from their money when it comes to having a sustainable income. Because of this disconnect, some retirees often believe they can spend much more money from their savings than their portfolios can sustain. Moreover, an issue that compounds this belief is the false notion that they will spend less during their retirement years.
The early years of retirement, when retirees tend to be the most healthy, are often spent taking vacations, having new experiences, and enjoying the newfound freedom. These spending habits and lifestyle changes can be quite hard to leave behind once they’ve become part of daily living, and just like any habit—it’s hard to break. The later years in retirement may bring increased medical costs right around the time one was planning to slow down the increased spending; thus, there may not be a decline in spending at all.
Since I was a young boy growing up, having a second home seemed to be part of the American retirement dream. I would often hear conversations about having a beach house or a mountain house to get away during retirement. We’ve even coined a term “snow birds” to refer to northerners who move down to warmer clients during the winter months. Obviously, there are numerous scenarios that can perfectly explain how retirees came to own two or more properties, so I won’t paint with too broad of a brush here.
In fact, I will specifically talk about clients who decide to take on additional properties during their retirement years without really doing their homework. Adding another home to your balance sheet often seems like a good investment, and trust me, there is no shortage of real estate agents that will agree with you (I like real estate professionals, but I’m being honest here). However, homes have to be insured, taxes have to be paid, and properties must be maintained. If you also consider that most purchasers are looking at areas where real estate is more expensive—and then looking at the nicest neighborhoods—the cost of acquiring a new home can add up quickly.
A common rebuttal I hear is that the property can be “rented out for additional income.” This seems logical; however, there are specific rules for rental properties when it comes to your taxes, and people often fail to think about the peak times to rent are also the times they want to use the property themselves!
“Well, if we don’t use it that much, we’ll just sell it.” This is usually the next statement.
What if you want to sell, but the real estate market for that area is in a slump? Can you afford to hang onto the property until the market recovers? What if it doesn’t recover quickly? What if you need to sell but are forced to take a substantial loss?
Second homes sound amazing. Full disclosure— I want one myself. However, it’s not a decision that should be made lightly. With careful planning, it still can be possible for some retirees. However, for others, you’d be better off taking one or two amazing vacations every year with the money you’d be spending just to own the vacation house.
This topic could potentially be a subtopic underneath the first one, where I discussed adult children. However, I believe it’s probably best to have it stand on its own because elder abuse is a real problem, and it continues to worsen as our population ages due to the fact that 70% of our nation’s wealth is controlled by people over 50.
In 2012, the CFP Board conducted a survey of 2,600 advisors, where they estimated that the average victim of elder financial abuse lost approximately $140,500. Worse than the staggering amount of losses people are enduring is the fact that some of the most common perpetrators of elder fraud are family members. It’s sad but true. As our society has changed and adapted with technology, we’ve been conditioned to suspect strange phone calls or emails; yet, it’s hard to imagine being suspicious of your own family.
One circumstance, often unavoidable, that makes elderly victims vulnerable is the fact that we simply need more help as we age. Elderly people are more at risk of becoming frail or experiencing forgetfulness, which usually results in them needing additional help. Typically, the first place to turn is family or close friends. Sometimes giving stewardship of one’s assets over to family members results in financial abuse, especially if there is no oversight.
To learn more about this topic, I highly recommend visiting the National Committee for the Prevention of Elder Abuse’s website. In my own practice, we have seen several clients experience attempted fraud, and luckily, we were able to step in and assist before permanent damage was done. Hopefully, this subject will continue to get the exposure and awareness it needs in the years ahead.
Our culture today is growing more and more independent and autonomous thanks to technology. We are seeing entire industries become obsolete due to advances in technology, and that doesn’t exclude the financial services industry. Financial insights, opinions, and commentary can easily be found from the comfort of your laptop, tablet, or smartphone these days. I won’t opine on the quality of all that information…I’ll just state that it’s available.
Now that we have unprecedented access to information, we also have potentially increased exposure to our own biases. Our confirmation bias can steer us towards the resources that support our own deeply held beliefs—about politics, about religion, and definitely about money. Overconfidence may bolster our belief in our ability to be “in the know” or manage our own affairs—-because, we can just Google it. However, I would like to offer a word of caution: trusted relationships in business are irreplaceable, and they always will be.
As you move through life, especially your retirement years, you may find yourself able to manage some aspects of your finances without much help. Most financial advisors that I know enjoy clients that are engaged in their financial endeavors. That being said, I would speculate that the vast majority of retirees did not spend their working years brushing up on the intricacies of financial planning, taxes, or asset management, nor do you expect to spend your golden years staying abreast of legislative and economic changes that may affect you.
Technology will continue to impact and enhance an advisor’s abilities just like it will your own, so don’t be tempted to marginalize a trusted, objective advisory relationship. It’s true that the dynamics of the relationship may change over time; however, there always has been (and always will be) wisdom in seeking advice from trusted advisors.
A key risk for autonomous individuals that are married is what happens to your spouse if you die first? Will they be as skilled at running things? Or, what happens if you develop capacity issues later in life? The truth is that having a financial advisor is almost always a good idea. Don’t be the solo act that goes broke or goes astray because you wanted to go alone. One of the most valuable aspects of having a solid financial planner during retirement is that they can help protect you from making the big mistakes that you don’t see coming.
*A special mention should go to Evan Simonoff, who originally wrote on this topic for Financial Advisor Magazine. I have changed some of the topics and wording; however, most of the information was inspired by his good work. You can read the original article from Evan here.