When it comes to retirement, there are several critical decisions people need to make before they retire. So says Steve Vernon, author of Retirement Game-Changers, a new book that reveals strategies for a healthy, financially secure, and fulfilling long life.
In our Retirement Daily podcast, Vernon spoke with us about most important decisions that older workers face as they transition out of the workplace and into retirement.
Financial decisions are important, but so are decisions regarding your health and your social life, said Vernon, who is also a research scholar at the Stanford Center on Longevity. That's why, he says, the subtitle to his book is: "Strategies for a Healthy Financially Secure and Fulfilling Long Life."
Why do pre-retirees and retirees need to think about their health?
"I call medical expenses and long-term care expenses the big, bad wolf of retirement," said Vernon. "And it can easily devastate your retirement unless you prepare. And I constantly referred to that nursery fable about the big, bad wolf and the three little pigs. And we know what happened to the first two little pigs who didn't make any preparation."
Vernon said he wants pre-retirees and retirees to "to be like the third pig who puts up the sturdy house to protect themselves against the big, bad wolf of retirement which is health care costs and long-term care costs."
Of note, Vernon takes issue with firms that publish present value estimates of how much money couples need to pay for healthcare costs in retirement. In April, for instance, Fidelity Investments estimated that the average 65-year-old couple retiring today will need $280,000 in today's dollars for medical expenses in retirement, excluding long-term care. Read more on this topic from Michael Kitces.
"I take issue with those kinds of numbers," said Vernon. "But first, we need to distinguish between medical costs and long-term care costs because those are two different things. Medical costs are to cover treatment to recover from illness or injury. You can really insure yourself against those kinds of costs by making good choices with Medicare, and then also making good choices with some kind of a plan to supplement Medicare, whether it's a Medicare supplement plan or a Medicare Advantage plan. That way, you've turned this risk into predictable premiums that you can then work into your income and budgeting plan. To me, that's the way to address medical costs."
By way of background, it's currently open enrollment season for Medicare beneficiaries. (For 2019 coverage, open enrollment will run from Oct. 15, 2018, to Dec. 7, 2018. During the annual enrollment period (AEP) you can make changes to various aspects of your coverage. You can switch from Original Medicare to Medicare Advantage, or vice versa.
"If you're already signed up for Medicare, now is the time to revisit what you previously elected," said Vernon.
According to Vernon, a better way to think about healthcare costs in retirement is think less about the present value amount of money required to pay for medical expenses and more about your cash flow.
"You pay it (medical expenses) out of your cash flows," he said. "You look at what your monthly premiums are for Medicare and what is your monthly premium for a Medicare supplement or Medicare Advantage, and ask if your cash flow covers that. That's really what you want to look at."
Viewed that way, a retired couple might need annual cash flow of $14,000 per year or less to cover Medicare premiums, as well as out-pocket-expenses, co-pays and the like.
"If you did add it up over 20 years, it will add up to those big scary numbers," said Vernon. "But you just don't have to have that in the bank, when you're retired, dedicated just to covering your medical costs."
To be fair, retirees and pre-retirees do need to consider long-term care costs and healthcare shocks not covered by Medicare, Medigap insurance, and cash reserves. "Long-term care is different from medical care in the sense that long-term care is custodial care for people who are frail," said Vernon. "And it covers things like preparing food and using the restroom and showering and bathing. And people who get really frail need long-term care."
And that expense is not covered by Medicare, he said. "So, folks need some kind of a strategy to address the risk of long-term care. You can buy a long-term care insurance. Some people do. Most people don't."
According to Vernon, if you don't buy a long-term care insurance policy there's another strategy to consider that he likes: Home equity. "It's kind of a default strategy, keeping that home equity in reserve," he said. "And then, that's the asset you might tap if and when you need to pay for long-term care. But I just want to say that long-term care is like the wildcard of retirement, and there aren't good solutions out there."
Vernon said another option would be hybrid long-term care/life insurance and/or hybrid long-term care/annuity products. "These are fairly new policies," he said. "They're worth watching. I can't put them in that perfect category yet. I claim there are no good strategies at this point. But that doesn't mean you don't do anything. It just means you have to pick among not so perfect solutions."
Vernon also suggested that one think long and hard about strategies that help one qualify for Medicaid. It's just not that easy, he said.
Another option to consider is purchasing a long-term care insurance policy with a long waiting period. "It's kind of like the high-deductible version of a long-term care policy because a lot of folks could self-fund a stay of six months or 12 months," he says. "It's the 10-year stays that you can't fund. And so, those policies aren't that common, but I happen to like that. It's a creative way to make long-term care insurance more affordable." Read more about long-term care insurance from the National Association of Insurance Commissioners.
With this strategy, it keeps your home equity intact. "Then if you don't need it to fund it for your long-term care that becomes a legacy to pass on to your children or charities," said Vernon.
Vernon also said a reverse mortgage could also play a role in paying for long-term care.
When it comes to managing the risks of longevity and inflation, Vernon offered this thought: It's worse than you might think. "First of all, when you see the averages of how long people might live, those are averages in the population," he said. "And what we're seeing, which is actually disturbing to me, is a growing inequality in life expectancies. We're all aware of wealth inequalities, and income inequalities, and we're seeing a growing disparity between people who have a college degree, have a steady job, maybe a retirement plan all the time, they are actually living longer than folks who don't."
So, he said, for those who have a college education, chances are they're in the upper half or third of the income spectrum, they're going to be living, on average, longer than the statistics you see in the media. "That's the first one is just be aware that it might be even worse, the longevity risk might be even worse than what you read in the media."
And given that you might have a long life expectancy, Vernon thinks retiring early isn't a good idea. If you're in your 50s or 60s, there's a good chance -- if you among those with a college education and in the upper half of the income spectrum -- that you could live in your late 80s, early 90s. And particularly if you're married, one of you has a good chance to live to 95. "Unless, you have a gazillion dollars, to you me it makes no sense to retire fully in your 50s and 60s, and expect to live on your financial resources for another 20, 30, 40 years," he said. "Not only does that take a lot of money but think about how many stock market crashes you're going to have to survive. And to me, it's very sobering to go back 30 years from 2017 back to 1987. We've had four stock market crashes in 30 years. So, looking forward, if you're going to live another 30 years, how many more stock market crashes do you have to withstand?"
What's the better option? "I think it makes a lot of sense, instead of just the traditional role of working full time, and then retiring full time in your late 50s or 60s, to phase out of the workplace, continue working maybe till your 70s, but do work that you like better, and not quite as intensely as you used to."
Vernon also said one of the best ways to deal with the risks of longevity and inflation is to start with Social Security. "If you delay that until age 70, you're going to have the maximum Social Security," he said. "It's inflation-protected. It has tax advantages. It's the perfect retirement-income generator."
Beyond that, he recommended buying a low-cost inflation-protected annuity or annuity that increases by 2% or 3% per year. "I like covering your basic living expenses -- food, utility, medical premiums, roof over your head with sources of income that are guaranteed to last the rest of your life like Social Security, like a pension, like an annuity, preferably if they adjust for inflation," he said. "I liked having a core set of retirement income that you can't outlive."
Vernon recommends investing the rest of your savings in stocks and use a conservative drawdown strategy. "That's the other way, in my view, to make the money last and keep up with inflation," he said. "So, this is how I'll put it together for protecting against, not only inflation risk, but longevity risk."
It sounds easy on paper, but it can be done in reality - if you educate yourself, Vernon said.
"No one said it would be easy to live another 20 or 30 years in retirement," he said. "And so, take the time to learn about your options, plan for retirement, it's not going to be done in an afternoon, and nobody said it would be a good idea to wing it."
It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.