It is truly American to worry about retirement, so let’s get the order straight:
—The No. 1 risk if that you’ll outlive your money, known as longevity risk.
—No. 2, being swamped by later-life medical and care costs.
—Coming in third is market risk, the periodic reality of bear markets.
And yet when the Center for Retirement Research at Boston College did its latest biennial survey of 20,000 older Americans, households with at least one person 65 years old put market risk at the top of things to worry about.
No biggie except people tend to act on their worries, and fiddling with your investment mix, trying to hop in and out of the market to avoid downturns, will not only likely lead to lesser returns, it’ll distract you from planning for a very long life, which is mostly a good thing.
Actuarial tables tell us that half of 65-year-old men in 2020 will still be alive at age 84. And half of 65-year-old-women in 2020 will still be alive at 86. But when asked to estimate their life expectancy at age 65, men on average said 77; women, 78.
We anchor on the age our parents died. Among the 65-year-olds in the survey the average age their parents died was 76.5.
To correct for that, try out the Social Security Life Expectancy Calculator; enter gender and age, and you’ll instantly be staring at your life expectancy at age 62, at your full retirement age (somewhere between 66 and 67) and age 70. Remember, this isn’t the age you should expect to die. It’s the age at which there is a 50% probability you will still be alive.
While Medicare covers the bulk of retiree health expenses, there are still sizable out-of-pocket costs. Moreover, Medicare doesn’t cover long-term care costs. Here, too, there is some risky underestimating occurring.
In the 2016 survey of retiree households, the actual average annual out-of-pocket cost for men over age 65 was nearly $4,000; for women, nearly $5,000. The out-of-pocket cost climbs with age; among those at least 85, the average annual cost was more than $8,400 for men; and $12,000 for women.
Yet when the survey asked participants between the ages of 65 and 69 how much they expected to shell out for medical bills in the next year, 44% of men and women answered less than $3,000. Among the 85+ crowd, less than 15% of men and women said they expected their medical costs for the coming year to be more than $8,000.
If you accept that you’ll be alive into your mid 80s, waiting until you are 70 to start collecting Social Security benefits is the single smartest move you can make. (This is most important for the highest earning spouse; less important when the lower earner begins drawing a retirement benefit.)
You don’t need to keep working full-bore until 70. You can likely generate the equivalent of the monthly Social Security benefit you’re not taking in your 60s with a part-time job. Another option is to tap some of your retirement accounts in your 60s, rather than start Social Security.
You might also consider whether you should own more in stock funds. The Center for Retirement Research study finds retirees were overly cautious about market risk, expecting it to work against them more often than it does, and to inflict a bigger loss. Keep in mind that the average bear market loss is recouped in about two years.
As for medical costs, if you’re still working and can afford the potential out-of-pocket cost of a high-deductible health plan you will qualify to save money in a health savings account (HSA). Money you save in an HSA is tax-deductible, and when you use the money for qualified medical expenses (this year, or 30 years from now) there will be no tax owed. It’s the most tax-efficient savings vehicle we have.
When you are about to turn 65, make sure you carefully consider the tradeoffs between picking Original Medicare versus Medicare Advantage.
And don’t forget about the power of moving your body. A healthier you might incur fewer medical costs in retirement, and at the very least be in shape to actually enjoy retirement.