With the markets near all-time highs, many investors are struggling with whether they should stay the course or adjust their investing strategy.
Jonathan Kahler and Kahlilah Dowe focus on market risk and health care expenses.
Gary Gamma: Jonathan, I want to bring you into the discussion here. Bill, from New Jersey, writes, “What are the potential risks in a retirement plan and how to avoid them by planning ahead.”
Jonathan Kahler: Yeah and, unfortunately, there are quite a few risks that could derail someone’s retirement plan. Some of them are exactly kind of what we’re mentioning here in the poll question.
A lot of it has to do with the uncertain nature of the time horizon that we’re really planning for. So we have, we’ve got personal risks, which could include unexpected healthcare expenses or the early death of a spouse that may have financial implications. On the flip side of that, you could have longevity risk, so the risk of outliving your assets or living so long that there’s a risk of outliving your assets.
Then you also have more fundamental risks, so market risks, experiencing bad returns early in retirement, the risk of unexpected high inflation, or tax and policy risks, as we mentioned. So I think it’s really important to think through that and kind of get a personal risk assessment of what really risks you’re most sensitive to and really think through how you can plan for each one of those.
We talk about market risk. You know, we can make sure that we have an appropriate asset allocation, that we have a good mix of stocks and bonds that we’re really comfortable with the risk and return tradeoff over a long-term period. If we think about inflation or longevity risk, we can look to make smart decisions with how we use our guaranteed income sources like Social Security, for instance.
Gary Gamma: So you talked about trying to figure out your time horizon. That’s one of the problems. What about healthcare issues, long-term care? How does that factor in?
Jonathan Kahler: Yeah, and that’s really one of the more difficult issues to plan for, right? A lot of people are under the impression that Medicare will cover long-term care costs, and that’s really generally not the case. When we look at research around this, we see that about half of us at some point will need to use the services of a nursing home. Most of those stays are going to be short term in nature, but about 10% of individuals—it’s a little bit higher for women, a little bit lower for men—but about 10% will need to have long-term care services for three years or more. And that’s really where those expenses can really add up.
So I think it’s important to kind of think through what your personal risk is there and how you would want to handle that scenario, whether it’s the purchase of long-term care insurance, which may be appropriate for some individuals or if it’s a matter of setting aside assets and self-insuring that need.
Gary Gamma: Yeah, no, that’s a tough one. I’m dealing with that situation now with a member of my family in a nursing home. Do you hear these kinds of concerns in your discussions?
Kahlilah Dowe: I do and I think this is probably the most anxiety-provoking kind of question. Like what about healthcare, what about long-term care, how can I plan for that? Especially for individuals who are fairly healthy and they have no idea when or how much they may have to pay out for those types of costs.
And some clients have health savings accounts that they use, that they’ve specifically set aside to cover or to start to cover some of those costs. But most investors just say I have this nest egg. It’s going to have to cover all of my expenses, and that’s probably going to be healthcare and long-term care as well.
And one of the ways that we try and deal with that is to just think about it in the context of your overall spending, and so I think it’s important to have a range where you know what you can spend at the high end and what you can spend at the low end, based on the assets that you’ve accumulated and also based on a projected time horizon.
And so for many investors, they’ll just say, “You know what, I may be able to spend $100,000 per year, but rather than doing that, I’ll go with more like $75,000 as a way to give more of a cushion for unexpected expenses.”
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