By Ken Waltzer, M.D.
Retirement can be scary for a number of reasons and individual reactions to these fears vary. Some people work longer to delay facing those fears, while others put their head in the sand, try not to think about the reasons retirement scares them and, as a result, don’t plan at all.
Whatever a person's fears and reactions, it’s best to face them up front, well before they retire, before they cause irreparable harm to their golden years. Below are nine of the most common retirement fears that I come across in my practice, and some suggestions for dealing with them now.
Running Out of Money
This is the first retirement fear that most of my clients express. They worry they will outlive their money, or that high expenses or poor market returns will decimate their savings. For some, these fears are rational. They haven’t saved enough and/or are spending above their means. However, even when the data indicate that such fears are unwarranted, they may nonetheless persist.
The first step in dealing with this fear is to make a retirement plan. Ideally, one starts the plan well before retirement so that there's time to make necessary changes before it’s too late (and/or too painful) to do so. I recommend engaging a financial planner to run the numbers, including alternative scenarios. The result of this exercise should be a comfortably high confidence level that income and assets are sufficient to cover expenses and liabilities for the rest of one's projected life (or lives). The plan should also make room for “contingent liabilities,” or expenses that may or may not occur.
If the projections don’t look as good as hoped, there are options to fix this. And the longer until one actually retires, the more options there are. These include:
- Spend less during retirement, e.g., downsizing the home.
- Spend less now so that one can save more.
- Reduce taxes, both before and during retirement.
- Accept a more aggressive portfolio (but not too aggressive).
- Work longer (delaying retirement by even one year can make a substantial difference.)
- Work during retirement (part-time and hopefully low-stress).
Sometimes, even when the projections look good, the doubts remain. What if I live past 100? What if the market tanks again (and again)? One option might be a fixed annuity.
While this approach will likely reduce the total amount one can spend during the retirement years, as well as how much one leaves to their heirs, it can assure people that they will always have enough cash flow to cover a certain level of spending. For some, this piece of mind is worth the tradeoff. For more on fixed annuities, see my article, Fixed Annuities Are an Underutilized Tool.
Out-of-Control Healthcare Costs
As a rule, healthcare spending increases as we age. Retirement savers can build these expenses into a plan, but what if a major illness strikes? What if healthcare expenses are far above average?
The key is having the right insurance. Medicare covers the basics, but it's essential to purchase Part B as soon as one is eligible (at age 65) to avoid the 10% late enrollment penalty for every year delayed. To fill in Medicare’s coverage gaps, there are two options: either purchase a Medicare supplement plan and Part D (medication coverage) or enroll in Part C (Medicare Advantage) to cover excess expenses. For more information on Medicare, see my article, How to Make the Most of Medicare. A good health insurance broker may also be worthwhile.
On top of worrying about paying for healthcare, there’s that nagging concern that health during retirement won’t be good enough to enjoy it. What good is having time to travel, go to shows and museums, etc. if health won’t permit it? Although failing health is a real concern as we age, we have more control over this than we might realize. At any time in your life, you can improve your health habits. It’s not that complicated: Don’t smoke or use harmful drugs, don’t drink alcohol to excess, eat healthfully, exercise regularly, get enough sleep, and address stress constructively.
There are plenty of sources for information on staying healthy; in general, it’s safer to stick with the mainstream. One financial bonus of healthier behavior: Your healthcare costs tend to be lower.
Requiring Long-term Care -- for a Long Time
Although only a minority of people end up needing long-term care for an extended period, it’s impossible to be sure ahead of time whether or not you will be one of them. Modeling long-term care in a retirement projection is difficult, and adding a large, but relatively unlikely, expense often breaks a plan. And, except for up to 100 days in a skilled nursing facility under specific conditions, Medicare doesn’t cover long-term care. For this reason, many people buy long-term care insurance, but decent policies are increasingly hard to find, and their costs continue to escalate.
There are options: Care by a family member is one, Medicaid planning is another. There are two big misconceptions about Medicaid and long-term care coverage: First, that only second-rate nursing homes take Medicaid; and second, that you need to be dirt poor to qualify. The reality is that many excellent nursing homes will accept Medicaid (and Medicaid can pay your spouse or other non-professional caregiver for home care). The key is to apply to the nursing home as a private-pay patient, switching to Medicaid later on when you qualify.
The rules for qualifying are complex and vary by state, but clever planning, well ahead of the need, can make even a well-to-do person Medicaid-eligible. Some financial planners and elder care specialists can help with this.
Caring for an Elderly Parent or Other Relative
A recent study by the Center for Retirement Research at Boston College finds that between 10% and 12% of retired individuals are caring for an elderly relative. These caregivers provide an average of 70 to 95 hours per month of care and spend an average of 35% of their budget on this care. Clearly, the burden can be substantial.
Be aware that you could spend a significant portion of your time and money during retirement caring for a parent or other elderly relative, so prepare yourself financially and psychologically. You should do your best to encourage healthy habits in your parents to lessen their dependence in later life. Knowledge of their finances is also important, to determine how much of a financial burden they are likely to be and lessen it through advance planning.
Preemptive Medicaid planning, discussed above, is also important for your parents. Medicaid will often reimburse caregivers for home care, including relatives such as yourself. For many of us, retirement planning must include late-life planning for our parents.
Supporting One or More Adult Children
Boomers are often called the “sandwich generation.” Since 1980, there has been an increase in multi-generational families, from 12% to 16%. While many of these are made up of children caring for elderly parents, an increasing number are made up of parents supporting adult children. On top of this, parents are sacrificing to support their children: A BankRate study found that 50% of Americans say they have sacrificed or are sacrificing their own retirement savings in order to help their adult children financially. Generous, but not always financially smart.
I can’t tell you how to raise your children, but it doesn’t do you or them any good if you sacrifice your retirement for them. My suggestion here is that you budget these expenses like anything else, putting a cap on them well in advance. Err on the side of conservatism, so as not to increase the chances of realizing another retirement fear, e.g., outliving your money.
Facing a Large, Unanticipated Expense
Other than those related to health and long-term care, or from your relatives, most large, unanticipated expenses come from natural disasters. And these are mostly insurable. Don’t neglect this important aspect of your retirement plan. Compared with most other types of insurance, property/casualty insurance is generally affordable, or you may be able to use government programs when it’s not.
Boredom/Loss of Purpose
In my experience, this seems to be more of an issue for men than for women. As a physician, I treated some couples. Several months after the husband retired, the wife would pull me aside and whisper, “Find him something to do. He’s driving me crazy!”
For many people, their career is their identity and consumes the bulk of both their time and their headspace. They don’t develop hobbies and other outside interests. After they retire, they feel lost, devoid of purpose. Needless to say, retirement generally doesn’t go well for them.
If you’re one of these people, you have some pre-retirement work to do. Obviously, finding interests outside your job is a first step. One way to see if you’re really ready is a trial retirement: Draw up a sample weekly retirement schedule and then live it for 2 to 3 weeks as a staycation. See how it feels. Tweak it as necessary.
The bottom line here is that retirement planning is more than just finances. You need to plan how you’ll spend your time as well. And determine in advance that you’ll actually enjoy how you spend your newfound time
Loss of Mental Stimulation/Cognitive Decline
This concern is a corollary of No. 8: Your days during retirement should not be filled with only television and golf. One of the most effective ways to stave off cognitive decline and dementia is to keep your mind active. Read. Do puzzles. Keep learning. Stimulate your senses, e.g., by cooking or baking. There is no shortage of ways to use your brain that don’t involve work. And they can be fun, as well.
Staying mentally active during retirement keeps your brain healthy at the same time it fights boredom. And a healthy brain can help keep the rest of you in better shape, improving your overall function (see No. 3), lowering healthcare costs ( No. 4) and reducing your chances of needing long-term care (No. 5). Along with exercise, mental stimulation is one of the best preventive medicines around.
So there you have it: Nine retirement fears and suggested solutions. Face your fears now, hopefully before you retire. And if you are already retired, it’s still not too late to deal with most of them. Happy retirement!
About the author: Ken Waltzer, M.D., MPH, AIF, CFA, CFP is co-founder and managing director of KCS Wealth Advisory, LLC, a registered investment adviser based in Los Angeles. He has worked full-time as a wealth manager since 2004, having previously been a practicing physician and medical entrepreneur. He started studying finance and investing for his own account in 1975 and has managed other people's money since 1997. Ken realizes that investing, like medicine, is both science and art. He combines the latest in capital markets theory with behavioral finance, informed by the insight and intuition that comes from 40-plus years of active investing. As in the doctor-patient relationship, he aims to help each client understand his or her financial prescription and stay on track toward a healthy financial future.