As professionals close out their careers today, they have some good news to look forward to: a long post-retirement life.
Healthier lifestyles and medical technology advancements have spurred significant growth in life expectancy in recent decades.
The downside? Ensuring there is enough in the coffers to pay for those additional years.
As Americans live longer and longer, the challenge of planning for retirement is intensified.
“I certainly see it can be a problem if we start living to 120 and longer,” said Aaron Kowal, managing director of Waukesha-based Kowal Investment Group LLC. “I think human longevity is going to go through the roof, so it will certainly take more planning overall to try to make it.”
Between 1989 and 1991, life expectancy at birth in Wisconsin was 77.4 years. By 2010 to ’12, it had increased to 80.3 years, according to the Wisconsin Department of Health Services.
A man who is 65 today can expect to live to 84, and a woman the same age today can expect to live to 87, on average, according to the U.S. Social Security Administration. One in four 65 year olds today will live past 90, and one in 10 will live past 95.
When Kowal works with clients on cash flow plans, he runs projections out to age 99, often prompting incredulous reactions.
“Most people say, ‘I’ll never live that long,’” Kowal said. “But I say, ‘Well, you’ve already outlived your parents by 10 years so you don’t know.’ With medicine and modern technology, you never know.”
Housing and health care can take a significant bite out of retirees’ budgets, and planning for those costs can be difficult, as no one can fully anticipate their future needs.
A recent health care cost estimate from Fidelity Benefits Consulting indicates that a 65-year-old couple retiring this year will need an average of $275,000 to cover medical expenses throughout retirement – a figure that excludes costs associated with nursing home care. Those projected costs are up from $260,000 in 2016.
While Medicare covers many health-related expenses for retirees, it’s not all encompassing. Services including dental, eye exams and long-term care, or help with everyday tasks, are not generally covered by Medicare.
Meanwhile, among people ages 57 to 61, 56 percent will stay in a nursing home at least one night during their lifetime, according to a recent study from RAND Corp. Among that age group, 10 percent will spend three years or more in a nursing home.
“No one knows if they’re going to need it,” Kowal said. “And with interest rates so low, combined with the nursing home industry being, I believe, the highest regulated industry in the country, it’s pushed those costs way, way up.”
The median annual cost of a semi-private room in a nursing home in the Milwaukee area is $110,748, or $132,492 for a private room, according to Genworth Financial Inc.
About a third of Americans in the 57 to 61 age bracket will spend their money on nursing home care over their lifetimes, the RAND study said, while 43 percent will be covered by private or public insurance.
While most Americans will need some type of long-term care, the RAND study found that just 12 percent of people in their early 60s take up long-term care insurance, which can be pricey. Kowal said he recommends life insurance with a long-term rider to his clients for a more affordable option.
Wisconsin also has a long-term care insurance partnership program aimed at encouraging people to plan for their future care needs, whether in their home, in a community-based setting or in a nursing facility. Under the program, an amount equal to the amount of benefits a person receives under qualifying insurance policies is excluded when determining the individual’s Medicaid eligibility and the amount to be recovered from the individual’s estate.
“If the policy covers $400,000 of long-term care needs, the state will look past $400,000,” Kowal said. “So if you use all those benefits, they won’t make you spend down all your money – they will only make you spend down to however much the long-term care policy paid out. So maybe you don’t have to sell your house or maybe you can still pass on some sort of legacy.”
Given the projected longevity of retirement, inflation heightens the challenges of financial planning.
Take the $111,000 semi-private nursing home room, for example. In 2047, that same room will cost $268,812, according to Genworth Financial projections.
“Inflation is that insidious thing that lurks there,” Kowal said. “…Clients are amazed when we look at the cash flow analysis that says, ‘You need $120,000 a year to live off of now, and in three years, you’ll need $350,000 to live off of.’”
Kowal said he advises clients that long term, stocks are the best hedge against inflation.
“People should have some in stocks to help keep up with the pace of inflation, because income from fixed income isn’t going to hold up as well as we hoped it would,” he said.
Still, Kowal said, the solution to retirees having to plan for more retirement years is simple.
“It really is about planning on the front end so you don’t run out on the back end,” he said. “With more planning, we’re going to have to continue to research and to develop strategies in our industry because I think people are going to live a lot longer. Nothing should be off the table when it comes to planning … Have a plan, execute the plan and, most importantly, monitor the plan.”
And while life expectancies continue to stretch longer, that’s no reason to delay financial planning and saving for the future.
“It gets harder to fix mistakes the older you get,” he said. “With the power of compound interest, you can make a lot more if you save more early, even if you put away less. So it’s important to get going early.”
