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Introduction:
The biggest difference between yesterday’s retiree vs. today’s retirees is the diminished defined benefits. Another big difference is the implementation of the ERISA Act of 1974 establishing the IRA and the Revenue Act of 1978 creating the 401(k). Research and industry studies have shown that pensions are rapidly being replaced by 401(k)’s. The California Public Retirement Employees system lost a staggering 30 Billion in 2022, which confirms that present day risks of pensions.
Risk #1). Longevity
Average life expectancy has increased from 68.14 years in 1950 to 76.4 years. The United States Emergency Response and with the outbreak of COVID-19, life expectancy decreased about 1.2 years, but retirees are still living longer. The Society of Actuaries estimates that a couple both reaching age 65 have a 50% chance that one surviving spouse will live until age 93. One of the biggest threat retirees’ faces now is outliving their savings. Nobody knows how long they will live, a 30-year retirement is not as uncommon compared to past generations.
Balancing Longevity: Research after research has proved that the best way to balance out longevity risks is by implementing a Three-Bucket Strategic approach. The major purpose is to allocate savings that address immediate, near-future, and long-term needs. Liquidity is anything within the next five years; income is what will be needed for 30 years or more. The measurement of growth and income identity is to offset inflation, taxes, and future health care expenses. Study also shows that delaying Social Security from full retirement at age 66 until age 70 will provide additional retirement credits at about 8% per year.
Risk #2). Inflation
Inflation is the decrease of purchasing power due to an increase in the price of goods. Since 1914, the average inflation rate has been 3.24%, and that number should remain constant even if the percentages have been high recently. However, we have seen the politicization and exaggerations of the United States supply-chains since the onset of Covid-19. Spending power is relevant to your pension plan because of inherent inflation risks and price gouging activities.
Alternative Investment Options: The United States Treasury created Inflation-Protected Securities (TIPS) and Series I bonds are typically an ideal way to hedge against inflation. However, many people invest in other Financial Products like, Annuities and Whole Life products that are guaranteed not to lose a dime of your hard-earned savings and most of these products have 6% to 12% interests. As a rule of thumb, you should stay away from speculative or high-risk investments, including private equity, penny stocks and alternative investments if they do not match your risk tolerance.
Risk #3). Tax Rates
The Tax cuts and Jobs Act of 2017 lowered the top tax rate to 37% starting in 2018 with the majority of the legislation set to expire in 2026. Whether a retiree is still working or has other forms of taxable income — for example, a pension, bank asset, annuity interest, short-term capital gains, ordinary dividends, municipal bond income and retirement plan withdrawals. The tax rates suggest that your Social Security benefits might become taxable.
Combined Tax Rates: In 2023, if combined income is between $25,000 and $34,000 for a single individual or between $32,000 and $44,000 for a married couple, up to 50% of their benefits will be included on their tax return. If combined income is more than $34,000 for a single individual or more than $44,000 for a married couple, up to 85% of their Social Security is taxed. This doesn’t even include another tax in retirement, like Medicare Part B premiums. Another important tool is the utilization of nonqualified annuities, instead of CDs and bank products. The goal is to offer a tax deferral system which can help with both Social Security taxation and Medicare Part B premiums.
Risk #4). Health care costs
Healthcare costs including long-term healthcare, insurance, Medicare Part B premiums, drug costs, co-pays, co-insurance and deductibles can be very costly. Fidelity estimates an average retired couple age 65 in 2023 may need about $315,000 saved (after tax) to cover expenses in their retirement. If taxable accounts are used, that amount might be higher when factoring in potential taxes paid.
Expenses may be lower in retirement for some than others, but the sentiment is that they’ll most likely increase overall.
Health Savings Accounts: Most people are not aware of Health Savings Accounts (HAS). These accounts offer tax-deductible contributions that grow tax-deferred, and withdrawals are possibly tax-free if used for health care expenses. In 2023, the maximum contribution limits are $3,850 for an individual and $7,750 for a family. If you are over age 55, you can chip in an additional $1,000 catch-up contribution. Another perk is that IRS states that owners of Qualified HSA Funding Distribution allows a one-time “trustee-to-trustee” transfer up to yearly contribution (whether individual or family) from IRA or Roth IRA. You want to always, get a few Financial Planning consultations before deciding without any financial research.
Risk #5). Long-term Care Costs
Long-term care costs by far are the most devastating to a retiree’s savings and investment portfolio. With home health care, assisted living and skilled nursing costs increasing on average 1.71% to 3.64% or more per year, what they cost today could easily double or triple by the time you need care. We looked at a Genworth 2021 Cost of Care Survey, and the most recent, home health care in 2021 was an average of $61,776, assisted living was an average of $54,000, and a private nursing home room was $108,405 per person. By 2051, home health care should be around $149,947, assisted living should be around $131,072, and a semiprivate nursing home room should be around $230,347.
Long-term Care Insurance: The best option to stop long-term care costs from depleting your hard-earned retirement savings is to meet with a Financial Insurance Agent or Producer and learn how to protect your retirement earnings. Insurance products are guaranteed and back by some of the biggest insurers in the United States, like Foresters, Mutual of Omaha, National Life Group, and American Eagle, just to name a few. If you meet the guidelines to rollover you retirement into an insurance product, these products are guaranteed, and there are riders or options that you can purchase to a). Pay the premiums if you should miss payments, b). Provide up too 80% of the cash value of the policy, should you become disabled and cannot work, c). Allow you to utilize your insurance policy to purchase assets and collaterals, d). Provide an immediate death benefit to your beneficiaries, e). Tax-sheltered, lawsuit resistant and, f). The Insurers guarantee you will not lose a single dime, unlike the 30 Billion that was lost in 2022 alone.
Risk #6). Lifetime Income
Up until the 1980s, we saw that pension plans made up a substantial part of a retiree’s income. According to the Government Office of Bureau of Labor Statistics, that percentage number has substantially dropped for private-sector workers, to now, a mere 20%. The Pension Rights Center states that only 31% of older Americans have a pension now. The concept of pensions used to be the strongest leg of the “three-legged stool,” consisting of Social Security, Savings Account, and the Social Security Forum. These concepts are presently failing right before our eyes now.
The Secure Act of 2019: Immediate annuities and indexed annuities with income riders focus on the distribution phase in retirement. The concept of annuities is based in building up or creating an estate. The SECURE Act of 2019 allows employer plans including 401(k)s and governmental plans such as 403(b)s access to lifetime income benefit options without having to transfer them to an IRA. However, over 1 Million peoples have converted and rolled over 401(k)s, 403(b)s, and IRA’s into more financial protective accounts such as Roth IRA’s, IUL’s, and Annuities.
Risk #7). Stock Market
The risk of falling stocks and the S&P 500 is the number one reason and fear that people are removing their retirements and other accounts from the stock market. NBC New York recently published a shocking article of how the US dollar is losing its value fast and how the Mexico peso is becoming, more and more, equal to the dollar.
Old-fashion rules, such as the 4% withdrawal rule, published in 1994, by the Journal of Financial Planning; provides little to no hope for retirees these days. Most retirees are forced to work at Walmart, CVS, Gas Stations, and other industries because they cannot live based on their present retirement plan.
Conclusion:
There are a lot of financial planning rules used by Wall Street and Hedge Funds to appeal to the market of stocks and bonds. The Rule of 120, previously known as the Rule of 100, is a perfect example of what the average American cannot do. The problem with this solution is usually timing and allowing human nature to interfere and/or bad actors. The Pension Retirement system is in serious jeopardy and people are literately losing the shirts off their backs. The financial marketing experts at Act Now Insurances believe that there is a pathway to protecting your pension and S&P 500 investment accounts. Everyone and every case is different. Many retirement plans and 401(k)’s may not need changing or replacing. You should talk to a Financial Marketing Expert or Planner if you believe that your retirement or S&P 500 accounts are risky and if you are losing your hard-earned retirement savings. These are the seven top biggest retirement risks to avoid - You should seriously consider annuities and 401k rollover products.
Billy Earley, MA, PA, AA, BS,
Financial Marketing Team
California Insurance Producer
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