With retirement planning, there is always the need to plan for the “unexpected”: emergency needs, potential home repairs, major medical situations, and so on. But there are also several expected—and fairly predictable—expenses that many investors may not fully take into account. This is not necessarily because of lack of planning, but more so because these expenses can be somewhat academic and less easily understood.
Take inflation, for example. Most folks understand the concept of inflation and that the costs of goods generally rise over time. But did you know that inflation rates for retirees and the elderly are generally higher than for any other demographic? That’s because the areas where elderly people spend the most also have the highest rates of inflation. Health care is the most obvious of these areas, but older folks also tend to spend more on housing which also has a high relative rate of inflation. The chart below shows how over the last 30 years, prices have risen more quickly for the elderly than for broad urban consumers:
When you breakdown spending by category, you can see the impact that healthcare and housing spending have on people over the age of 65 versus younger spenders:
Another common retirement challenge is actually a combination of suboptimal strategies: withdrawing too much while not growing enough. It is a generally accepted principle that retirees should avoid withdrawing money from their investment portfolio at too high a rate, with 6% usually being at the top-end of the recommended amount. But the problem of high withdrawal rates gets compounded when the retiree does not adequately compensate with growth. Research from JP Morgan showed that if an investor withdrew 4% and had higher equity exposure, their portfolio tended to last longer and maintain a higher balance than investors who had reduced equity exposure. The bottom line: if possible, it makes sense to minimize your withdrawal rate and maintain exposure to stocks.
Overcoming Retirement Planning Challenges
Of course, the issues of higher inflation and the impact of high withdrawal rates can be accounted for and planned against. Investors simply need to work with their financial advisors to make realistic projections for how inflation could impact their cash flow needs later in life, and the financial advisor can also run Monte Carlo simulations to demonstrate the impact of different withdrawal rates versus portfolio allocations.
Another emerging idea for countering retirement challenges is called “Phased Retirement” This concept is increasingly being applied to corporations hoping to have older workers train younger ones for high skilled jobs instead of just retiring ‘cold turkey.’ For retirees, this could mean the best of both worlds – a more gradual transition away from the workplace and towards retirement, while also providing a little extra income in retirement years to help cushion against the challenges of rising costs. According to the Society for Human Resource Management (SHRM), 14% of U.S. companies offered either a formal or informal phased retirement program this year, up from 10 percent in 2012.1
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Whatever route you choose to take, it makes sense to enlist the help of an experienced financial advisor who can work with you on the details of your retirement investment plan. At WrapManager, our Wealth Managers are trained to help you navigate these challenging issues, while helping you find solutions that are customized for your lifestyle and goals. To speak with one of our Wealth Managers today, just call 1-800-541-7774 or send us a quick email at wealth@wrapmanager.com.
Source:
1. Bloomberg
