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Category: Retirement Risks

Inflation risk

Inflation as a Risk in Retirement

July 21, 2022

Inflation can be troubling, especially for those living on a fixed income. Here’s what you need to consider.

Exiting the work force and beginning the next chapter of your life can be infinitely exciting. After a long career, free time afforded by retirement offers a great opportunity to check off long-awaited bucket list items or develop those relationships with loved ones. You might also stop setting alarms in the morning, making sure that you get the right amount of sleep to propel you toward your dreams. There is, however, one area in which you might not want to hit the snooze button: your finances.

With improvements in science and medicine have come increases in life expectancy, extending the length of retirement for the modern worker. While it’s great to plan to be around longer to pursue passions and spend time with family, longer life expectancy does present a challenge. Retirees used to plan for 10 to 15 years of retirement, but it’s no longer strange for someone to live to 100, meaning that retirement could potentially last 30 years [1].

Prolonged retirement can bring about longevity risk, which is the risk of running out of money while still alive, and inflation provides zero relief when it comes to making your money last. Inflation decreases the purchasing power of the dollar, which can create a serious problem for retirees living on fixed incomes and retirement accounts they’ve built over the course of their careers. Now inflation is at a 40-year peak [2], which can cause headaches, especially for those entering retirement as they’re forced to deplete savings faster than they might have under lower inflation rates.

Luckily, there are a few ways to alleviate some of the pain points when it comes to inflation in retirement. First, it can be beneficial to contribute to your retirement accounts early in your career. You can begin planning for retirement too late, but you can never begin too early. Some investment vehicles designed to build retirement assets for your future include employer-sponsored 401(k) plans, 403(b) plans, traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

Traditional 401(k) and IRA accounts grow tax-deferred, meaning that contributions will be made before taxes are taken from your paycheck then are taxed upon distribution. Roth accounts are distributed and grow tax-free if all IRS regulations are followed, but initial contributions are made with post-tax dollars. Both grow with compound interest; which Albert Einstein called the eighth wonder of the world. Compound interest means you will accrue more interest through time based on your growing account balance, so taking the time to feed those accounts when you’re younger can be extremely rewarding.

If you are getting close to retirement and don’t have decades of time on your side, there are a few more things about inflation that you should know.

Social Security considers inflation annually when calculating benefits, and some years it provides a cost-of-living adjustment, or COLA, based on one of the federal government’s consumer price indexes called the CPI-W. In 2021, Social Security beneficiaries received a 5.9% COLA, which was the highest increase since 1982, but it’s important to remember that COLA may not always cover increased costs. For example, beneficiaries received no increase in 2015[3] despite an incremental 0.12% inflation rate [4].

Some annuities are also specifically designed to combat inflation by offering a COLA. Annuities are contracts between buyers and issuing insurance companies which guarantee annuity payments based on the insurance carrier’s claims-paying ability [5] as well as the terms of the contract. With annuities that offer a COLA, the pre-determined payments may be adjusted to account for inflation.

Lastly, it’s always important to consult your financial professional to find solutions to suit your unique, individual situation. The proper guidance can assist you in determining whether or not you’re placing enough money into various retirement accounts to account for future inflation without disrupting your desired lifestyle.

If you have any questions about how inflation may affect your retirement, please give us a call! You can reach your private wealth advisor at Silverhawk Private Wealth by calling 480.296.0200. We have offices across the United States to serve you. 

 

Sources

  1. https://money.usnews.com/money/retirement/articles/how-living-longer-will-impact-your-retirement
  2. https://apnews.com/article/key-inflation-report-highest-level-in-four-decades-c0248c5b5705cd1523d3dab3771983b4
  3. https://www.ssa.gov/oact/cola/colaseries.html
  4. https://www.worlddata.info/america/usa/inflation-rates.php
  5. https://www.investopedia.com/terms/l/lifetime-payout-annuity.asp

Interest rates, bond prices and inflation are related. Here’s how.

March 24, 2021

The Federal Reserve

“Part of the mission given to the Federal Reserve by Congress is to keep [consumer] prices stable–that is, to keep prices from rising or falling too quickly. The Federal Reserve sees a rate of inflation of 2 percent per year–as measured by a particular price index, called the price index for personal consumption expenditures–as the right amount of inflation.

“The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.”  ~The Federal Reserve of Cleveland

Interest Rate Risk

In general, low interest rates can be good for mortgage and other consumer loans because you will pay less to borrow money. However, low interest rates are not so good when you’re looking at the low interest credited on savings accounts and CDs.

But the main reason interest rate risk is considered a risk has to do with bond prices.

About Bonds

Bonds are basically fixed-rate loans with set maturity dates. Buying or selling them before maturity, when current interest rates might be higher or lower than the bond’s face value interest rate, is what affects their price.

In general, when interest rates go up, bond values go down. As bond prices increase, bond yields fall. Interest rate risk is common to all bonds, even U.S. Treasury bonds.

“The most important difference between the face value of a bond and its price is that the face value is fixed, while the price varies. The face value remains the same until the bond reaches maturity. On the other hand, bond prices can change dramatically.” ~Investopedia

Why You Should Care

Pre-retirees and retirees with money invested in the stock market often have the majority of their investments held in bonds after they reach age 50+ because in general, bonds are often considered “safer” than stocks.

A common principle used by some stockbrokers and bankers called “the Rule of 100” uses age to determine how much of their client portfolios are held in bonds versus stocks. The rule works like this: When you are 60, 60% of your portfolio will be in bonds versus 40% in stocks, when you’re 70, 70% will be in bonds versus 30% in stocks, etc. going up from there.

This shift to more bonds and less stocks as you get older happens automatically in many 401(k) “target date” funds as well.

Bonds Versus Bond Funds

Because the term “bonds” is often used interchangeably with “bond funds,” it’s important to know that some Wall Street experts consider bond funds to be correlated with stock market risk, and therefore not “safer.”

“A bond fund is simply a mutual fund that invests solely in bonds… An investor who invests in a bond fund is putting his money into a pool managed by a portfolio manager. Most bond funds are comprised of a certain type of bond, such as corporate or government bonds, and are further defined by time period to maturity, such as short-term, intermediate-term, and long-term. Some bond funds comprise of only one type…Still, other bond funds have a mix of the different types of bonds in order to create multi-asset class options.

“The types of bond funds available include: US government bond funds, municipal bond funds, corporate bond funds, mortgage-backed securities (MBS) funds, high-yield bond funds, emerging market bond funds, and global bond funds…Typically, a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity.

“In other words, bond funds are traded on the market, and the market prices on bonds change daily, just like any other publicly-traded security.” ~Investopedia

 

What’s Happening Now: The Headlines

 

  • Inflation Fears

“Inflation is near a decade low and well below the 2% level the Federal Reserve targets as ideal. The usual conditions for rising inflation—tight job markets and public expectations of rising prices—are glaringly absent. Yet anxiety about inflation is at a fever pitch, among economists and in markets, where long-term interest rates have been grinding higher since President Biden unveiled plans for huge new fiscal stimulus.” ~Wall Street Journal

  • Rock Bottom Interest Rates

“The Federal Reserve’s emergency rate cut back in March [2020], which dropped the benchmark interest rate to zero, is likely here to stay…the Fed publicly stated that even if inflation starts to pick up again amid the economic recovery from the coronavirus pandemic, it doesn’t expect to raise interest rates any time soon as the labor market rebounds. Wall Street economists predict that these rock-bottom rates may be around for the next several years. In fact, after the 2008 Global Financial Crisis, the Fed kept benchmark rates low for seven years. While this means that borrowing becomes cheaper for those who can get approved for loans, it’s not such good news for savers.” ~CNBC

  • Bond Yields Higher

“The 10-year U.S. Treasury yield climbed back above the 1.5% level on Thursday [3/4/21] after Fed Chair Jerome Powell said there was potential for a temporary jump in inflation and that he had noticed the recent rise in yields. The yield on the benchmark 10-year Treasury note rose to 1.541% shortly in afternoon trading. The yield on the 30-year Treasury bond pushed higher to 2.304%. Yields move inversely to prices.” ~CNBC

“If you hear that bond prices have dropped, then you know that there is not a lot of demand for the bonds. Yields must increase to compensate for lower demand.” ~The Balance

  • Long-Term Bonds Face Nearly Zero Upside

“Buffett is bearish on bonds. Why does [Warren] Buffet think that “bonds are not the place to be these days”? Yields on Treasurys are near historical lows, and investors locking in these low returns by investing in long-term bonds face nearly zero upside with significant downside if rates rise.” ~Think Advisor

 

To Recap: Interest Rate Risk / Bond Risk / Inflation Risk

 

  • Bond Risk: In general, when interest rates go up, bond values go down. Interest rate risk is common to all bonds, even U.S. Treasury bonds. A bond’s maturity and coupon rate generally affect how much its price will change as a result of changes in market interest rates.
  • Inflation Risk: Inflation risk is the risk that rising costs will undermine purchasing power over time. The Fed will raise interest rates if inflation rises.

 

Inflation risk, bond risk, and interest rate risk can be managed through strategies like portfolio diversification, insured solutions that offer inflation adjustments, and by proper financial and retirement planning.

It’s more important than ever to make sure you are protected from multiple risks as you get closer to or are already in retirement. If you have any questions about your situation, please don’t hesitate to call us. Please contact your private wealth advisor at Silverhawk Private Wealth at 480.296.0200. We have offices across the United States to serve you.

 

 

 

Sources:

https://www.clevelandfed.org/en/our-research/center-for-inflation-research/inflation-101/why-does-the-fed-care-get-started.aspx#

https://www.investopedia.com/terms/b/bond-yield.asp

https://www.investopedia.com/ask/answers/013015/how-does-face-value-differ-price-bond.asp

https://www.cnbc.com/select/what-happens-when-interest-rates-go-down/

https://www.cnbc.com/2021/03/04/us-bonds-treasury-yields-lower-ahead-of-fed-chair-powells-speech.html

https://www.thinkadvisor.com/2021/03/03/is-buffett-right-to-be-bearish-on-bonds/

https://www.investopedia.com/terms/b/bondfund.asp

https://www.wsj.com/articles/is-inflation-a-risk-not-now-but-some-see-danger-ahead-11614614962

 

 

Older woman considering inflation risk in her retirement planning.

Does Your Retirement Plan Include Inflation Risk?

November 20, 2019

Inflation may not always be top of mind when you think about planning for retirement. Of course, you will likely consider your current expenses, but you need to account for what the costs of those expenses could be over time.

None of us can predict the future, but we can plan. Inflation diminishes purchasing power over the years and increases the costs of services that retirees and pre-retirees need. Given that more Americans are living longer, it can pay dividends to include inflation risk in your overall financial planning.

The other issue we have to contend with when it comes to inflation is that we may be lulled into a false sense of security since government measures of inflation have been very low in recent years. In addition, safer investments like money market funds, CDs and government bonds generally yield less than the cost of goods and services that many of us need. This makes it difficult for our safe money investments to keep pace with our expenses.

Lower government inflation measures also have an impact on Social Security benefits. Among the features of Social Security is that benefits are generally adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. In October, the Social Security Administration announced a 1.6% COLA that takes effect in December for some beneficiaries and by January for most.

The average benefit increase for retired workers with the recently announced COLA is estimated to be $24 to $1,503 per month. Married couples both receiving benefits will see a $40 increase, on average, to a monthly payment of $2,531. The cost-of-living adjustment for 2020 is lower than that of 2019, which was 2.8%, and 2018, which was 2.0%.

Getting the most out of your Social Security benefit is extremely important for your retirement and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, so planning is important.

Health Care and Medical Cost Inflation

Then there is health care, among the biggest costs you may encounter in retirement and even now if you are still working and saving for retirement. Medical cost inflation is real and it can negatively impact your savings if you don’t have a way to offset it.

The Centers for Medicare & Medicaid Services (CMS) estimated earlier this year that health expenditures are projected to increase 4.8% overall in 2019, up from 4.4% growth in 2018.

For those still working and covered by an employer’s plan, costs are outpacing wages and inflation. Since 2009, the Kaiser Family Foundation says average family premiums have increased 54% and workers’ contributions have increased 71%, several times more quickly than wages (26%) and inflation (20%).

If you are already enrolled in Medicare and have been incurring out-of-pocket expenses then you know the impact of what higher drug costs or services that Medicare doesn’t cover can do to your monthly budget. We often cite figures from Fidelity Investments, estimating that a 65-year old couple retiring in 2019 can expect to spend $285,000 in today’s dollars for health care and medical expenses throughout retirement. The figure doesn’t include long-term care.

Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. The other thing to keep in mind is that while inflation has been low in the past decade, it is best to plan using higher long-term averages.

There are several ways we can address inflation risk, depending on your situation. Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. You will want to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk. Now is also a good time to contact us to discuss Medicare because the current open enrollment period runs through December 7 if you want to make changes or switch plans.

Let us know how we can help!

Contact your Silverhawk Private Wealth Advisor in Scottsdale, Orange County, Denver, Memphis or Seattle by calling 480.296.0200. 

 

 

Sources:
“Social Security Announces 1.6 Percent Benefit Increase for 2020,” October 10, 2019. Social Security Administration. Retrieved from: https://www.ssa.gov/news/press/releases/2019/#10-2019-1
“National Health Expenditure Projections 2018-2027,” February 2019. Centers for Medicare & Medicaid Services. Retrieved from: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf
“Benchmark Employer Survey Finds Average Family Premiums Now Top $20,000,” September 25, 2019. Kaiser Family Foundation. Retrieved from: https://www.kff.org/health-costs/press-release/benchmark-employer-survey-finds-average-family-premiums-now-top-20000/
“How to plan for rising health care costs,” April 1, 2019. Fidelity Investments. Retrieved from: https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

Make Room for Rising Healthcare Costs in Retirement

August 19, 2019

Does your retirement plan include strategies to plan for, manage, and even reduce healthcare costs in retirement?

It is projected that an average healthy 65-year-old couple retiring this year will incur total lifetime healthcare costs of $387,644 in today’s dollars, according to research by HealthView Services, a provider of retirement healthcare, long-term care and Social Security optimization tools for the financial services industry. The figures were released in early July.

To no surprise, as the couple ages, costs will be significantly higher later in retirement than at the beginning. In the first year of retirement, the couple’s total annual premium and out-of-pocket expenses may average $12,286. In twenty years, at age 85, you may need $34,268 to cover these costs.

These figures include Medicare premiums, Medigap or Medicare Supplemental premiums, dental and out-of-pocket costs related to hospitalizations, doctor visits, and drugs, among other items. (But they do not include long-term care.)

We recently wrote about the idea that traditional thinking suggests that, when you retire, you will need to replace less of your current income or what you were earning while you were employed, (generally, about 80%). We noted that some retirement specialists disagreed and even suggested as much as a 20% increase above what you might think you need – partly for higher travel and entertainment expenses during your “Go-Go” years, unexpected expenses and inflation.

We also called your attention to healthcare costs and spending. What is important to note here is that standard benchmarks about what percentage of your income you will need to replace in retirement may assume that a portion of your healthcare expenses are covered when they may not be. “New retirees, who generally paid approximately 25% of their medical premiums during their working years, are often surprised by the cost of healthcare in retirement, when they are responsible for 100%,” HealthView Services says in the white paper.

Another risk to think about when planning for healthcare costs is longevity, an important retirement risk we also address with you when it comes to income planning. On average, healthy Americans’ projected annual healthcare costs will be lower than those with health conditions. Yet, since they are expected to live longer, the lifetime costs they need to plan for will be higher.

Here’s an example. A healthy 55-year-old woman living to her actuarial longevity of 89 will need to plan, on average, for $424,875 in lifetime healthcare costs (future value, not today’s dollars). If she has Type 2 diabetes, her actuarial longevity falls to 80 and projected total costs would be $266,163, according to HealthView Services.

It’s never too soon to start planning because healthcare cost inflation, projected by HealthView Services to be 4.41%, and its compounding effect will drive higher healthcare expenses for those currently in their 40s and 50s.

On the bright side, Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital, says we’re not powerless when it comes to planning for future healthcare costs. “Taking steps to improve health can reduce annual medical expenses. Investing these savings, increasing contributions to retirement plans, and working with an advisor to optimize product selection with healthcare in mind can significantly reduce this retirement burden,” he said.

If you are a few years away from retirement, we can plan now to offset your potential future healthcare costs.

Call us to schedule a retirement plan checkup. We will review your income sources and expenses to fine tune and manage your plan so you stay on track for the healthy retirement lifestyle you want to experience. To speak with a financial consultant at Silverhawk Private Wealth, call 480.296.0200. We have offices in Scottsdale, Irvine, Seattle, Memphis and Denver to serve you. 

 

 

Sources:
“Why Health Needs to Be Part of Retirement Planning,” July 8, 2019. HealthView Services. Retrieved from: http://www.hvsfinancial.com/why-health-needs-to-be-part-of-retirement-planning/
Here is a link to the full white paper: http://www.hvsfinancial.com/wp-content/uploads/2019/07/Health-in-Retirement-Planning.pdf

“Longevity Risk” in Retirement

July 25, 2016

What exactly is “risk of longevity”? You may have questioned this when visiting with one of our advisors at Silverhawk Private Wealth. Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that you will outlive your wealth.
It’s a fact that people are living longer. Not only has life expectancy increased, but statistics show that one out of every four 65-year-olds living today will live past the age of 90. One out of 10 will live past 95. The number of centenarians—100 or older–increased more than 43% from 2000 to 2014!
From a financial point of view, living a long time can drastically affect many of your retirement costs, impacting and presenting a “risk” to many different items in your budget—right when you will be living on a fixed income. It is our goal at Silverhawk to apply the Tria Formula℠ as one tool to prevent this from happening with our clients.
Let’s examine some of the issues affected by longevity:
1. Health Care

Health care expenses are a large line item in any retirement budget—even with Medicare. A healthy 65-year-old couple can expect to spend approximately $266,589 to cover health care expenses not covered by Medicare Part A during their retirement on Medicare Parts B, D and a supplemental insurance policy (sometimes called Part C, Medigap or Medicare Advantage). This assumes at least one of them worked and paid Medicare taxes and so their Medicare Part A premiums are covered.

And that total doesn’t even include dental, vision, co-pays, deductibles and out-of-pockets. When you add those into the total health care outlay, a couple’s costs rise to $394,954 throughout retirement. Living longer not only increases yearly health care expenditures, but your chance of developing a serious health issue also rises as you get older, increasing your costs incrementally.

2. Incapacitation

Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, statistics indicate 70% of people over 65 end will up needing some form of assistance. The average yearly cost of a private room in a nursing facility is $91,000.

Medicare is designed for an inpatient stay of 90 days or less, after which high daily coinsurance costs kick in. Medicaid requires a spend-down all of assets to poverty level. There are many options to this scenario that you definitely want to consider.

3. Inflation

It’s a given that prices will continue to get higher every year—in fact, inflation is part of the Federal Reserve’s monetary policy. Inflation undermines your purchasing power over time. While it’s true if the Consumer Price Index (CPI) rises in a given year, retirees get a COLA (Cost-of-Living Adjustment) increase on their Social Security benefit checks, for the last few years, there has been no COLA, primarily because of low oil/gasoline prices. It goes without saying that the longer you live, the more you will spend on consumer goods and living expenses.

4. Excess Withdrawal / Inadequate Income

If your portfolio isn’t structured properly to provide enough income for a long life, you may be at risk of running out of money. Unexpected family expenses or needing to withdraw money during a market downturn can affect your nest egg negatively for the long term (kind of like compound interest in reverse). The death of a spouse is also a risk to your income.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning to help mitigate your risks.

Please contact your Private Wealth Advisor at Silverhawk, or me, at any time.

Kindest Regards,
Paul J. Mershon,
CFP®, CLU, ChFC, RHU
President, Silverhawk Private Wealth

Why Stock Market Corrections are Worse for Retirees

November 30, 2015
 Are you buckled in? The equity markets are said to be heading for a correction. A stock market correction is defined when major market indexes decline at least 10%. Drops greater than 20% are considered to be bear markets. In the last 15 years, stocks have experienced multiple corrections and two bear markets*.

Gambling on Your Retirement

Stock market volatility is a fact of life. Younger investors can afford to give some back because they have time to recover. For retirees it’s a different story entirely.

Those of us at or nearing retirement can’t afford to lose 20% of our portfolios because of the shortened investment horizon. Think about it. Could you handle a 20% decrease in income? What about 40%-50% less like we saw in 2008?

Capital Preservation is Key

After saving all those years, once in retirement, your goal is to protect your assets and create a predictable, stable income stream. Of all the risks out of your control, such as health risk, inflation risk, interest rate risk and longevity risk, market risk is one you CAN control. You can choose to expose yourself to market risk or not. And there are alternatives that protect and grow your savings and produce income at the same time.

Transferring Risk

When you invest in the stock market, you take on 100% of the risk. Did you know there is a way to totally eliminate market losses, achieve desirable growth and create an income stream you can depend on as long as you live?

If we haven’t talked about it recently, please contact us so we can share the latest choices in the ever-advancing retirement solutions market. Then you can get back to getting a good night’s sleep.