1. Life Expectancy – the average life expectancy for women today is 81 and for men is 76, up almost 9 years since 1960. My mother, Nancy, died at 92, and her sister, Caroline will be 101 in the fall of 2018. This is not uncommon. Heart disease and cancer are still the two largest causes of death, but people are living longer with these and other chronic conditions. Due to improvements in medical treatment and drugs, what would have formerly been a death sentence is now prolonging life for many people. We have not planned to live well into our late 80’s, 90’s, or beyond.
2. Need for care in the future – Millions of us are helping family members try to stay independent and perhaps finding the right care solution. The number of adults taking care of aging parents has tripled in the past 15 years, and a full 25 percent of grown children are helping their parents by providing either personal care or financial assistance Some are taking care of children, grandchildren and parents. Needing care is expensive. My mother lived with me for the last 2 years of her life after she spent down her retirement savings. I was responsible for hiring and firing caregivers, ordering medication, paying her bills and making sure that she had the care she needed including hospice. In the case of Aunt Caroline, turning 101, my cousin, in her 70’s has moved in and is taking care of her. Working with other family members and medical staff to develop a care strategy can become almost a full-time job.
For working women in particular, caring for older parents will reduce growth of salaries, the types of jobs you can have, promotions, future earnings, savings and contributions to Social Security While many people in their 50’s, 60’s and 70’s are in this position, a small proportion of them have planned for their own potential need for care in the future. There are several options to choose from today when seeking to protect yourself and your assets in the future from a potential need for care.
3. Financial literacy – For the trailing 10-year period through last year's close, the US stock market earned an annualized 6.95%, or nearly double the investor return of 3.64% For the last 30 years, it is even worse. The average equity investor earned a hair below 4.0% a year while the S&P deliver a bit more than 10%. Why is that? People buy when the market is up and get out (like in 2008) when the market declines. It is responding to an emotional rollercoaster which severely hurts the returns on your savings vs. having and sticking to a strategy.
In general, women are not as financially literate as men. Many women were raised to have children and take care of their home and defer to their husbands about financial matters. Women also tend to be less inclined to take risks and put more money in no interest or low interest savings. They miss opportunities such as the growth in the bull market we have had over the last 10 years. On the other hand, men can be more speculative and often actively trade their accounts when they would have done better buying and holding. Having a long- term plan and sticking to it as well as having a diversified portfolio and an investment policy statement can help you to achieve your goals.
4. Inflation is not your friend – the common way to look at inflation is through the Consumer Price Index or CPI. The current CPI is 2.5% which is a calculation for the cost of goods and services. Frequently it is quoted excluding food and energy prices which is a lower figure. Since we all consume food and energy, I don’t think this is a useful number when trying to determine inflation. When you look at your possible personal expenses including health insurance and medical care, college education, and property taxes, these have all increased at a rate exceeding 2.5%. So, I generally factor in an inflation number in the mid 3% when creating a plan.
5. Taxes in retirement – traditionally, people put retirement money away into 401k’s and IRA accounts. These are good savings vehicles particularly if there is an employer 401k match. However, since these funds are generally pre-tax, the contributions and the growth on those contributions are subject to ordinary income taxes when you take them out in retirement. Further, when you turn 70 ½ you are required to take distributions called required minimum distributions or RMD’s. These start at roughly 4% of your account value and go up as you age.
Developing a strategy to diversify your retirement holdings to include tax free income or tax favorable income can help to lower future taxes you have to pay in retirement. Tools include Roth IRA’s, life insurance, income real estate and other strategies. So, you can create pools of assets which contain a taxable portion and a tax-free portion of income so that you can manage future tax liabilities.
Having a financial plan that addresses these potential risks will help you to achieve success and reach your retirement goals.