Biggest Fear in Retirement – Running Out of Money Revisited

Transcript of Podcast Episode 220

Hello, this is Bill Rainaldi with another edition with Security Mutual’s “SML Planning Minute.” In today’s episode, we take a look back at one of our favorite previous episodes, “Our Biggest Retirement Fear: Running Out of Money.”

What’s the biggest fear people have in retirement?  Well according to the Journal of Accountancy, Americans’ biggest retirement fear is running out of money.  In a survey conducted by the AICPA, 41 percent of CPA financial planners say running out of money is their clients’ top concern about retirement, even including clients who have a high net worth.

Among the reasons for this is simply that so many people are living well past their life expectancy.  And there’s another phenomenon: baby boomers are at what’s called an “economic crossroads.”  Many are supporting both their parents and children at the same time.  This of course exacerbates the fear people have about running out of money.

On the other hand, some have suggested that the fear of running out of money is overblown.  According to an author at CNBC, you’ll need less, you’ll spend less, and you can simply find out ways to make money while in retirement.  This is not a popular sentiment.  It all sounds good, but for most people the whole point is being able to maintain the same standard of living you had while you were working.  And many people come to realize that once they retire, they’ll have about the same expenses as before and be in the same tax bracket.  It’s nice to think that you’ll be able to spend the same amount in retirement, but not everything goes as planned.

There are several steps that you can take to assuage you fear of running out of money.  The most obvious and important step is simply to start saving as much as early as you can.  This is something we discussed in detail during episode 13.

You also need to find ways to reduce your tax burden both before and during retirement.  This includes tax-advantaged investing and could even include moving to a tax-friendly state.

Also, long term care insurance or a chronic illness rider on a life insurance policy can go a long way.  The last thing you want to do in retirement is spend everything you have on health care costs.

There is also Social Security.  One way to avoid running out of money in your later years is to understand how Social Security survivor benefits work.  Assuming you live past age 70, for a married couple the survivor benefit is simply the higher of the two.  So if, for example, you’re collecting $2,000 per month and your spouse is collecting $1,000 per month, when you die your spouse’s benefit will go from $1,000 to $2,000 per month.  So in that case, the higher your benefit is, the higher your spouse’s survivor benefit will be.  Keep in mind though, that in this case the overall household income will still nonetheless decrease by $1000 per month since the lower Social Security benefit will be eliminated. This can be especially important if you’re significantly older than your spouse.

So how can you use Social Security to help mitigate the risk of running out of money?  The answer is simply by delaying when you collect. If you wait until age 70, you will maximize your own benefit and quite possibly your spouse’s survivor benefit.  We had a more detailed analysis of this in episode 49.

Things begin to shift when you get deeper into retirement.  According to the AICPA study, after 10 years of retirement, health becomes the biggest concern. At that point, 44% of financial planners say that serious illness, including dementia and diminished capacity, is their clients’ biggest worry.

Although people become more concerned about cognitive decline once they’ve been retired for a while, according to the survey, just 18% of planners say that their clients are proactive about this problem.  The AICPA has some other suggestions that planners and family members can use:

Don’t assume anything.  It’s important not to assume that someone isn’t concerned or affected, or that someone else will address the problem with them.  It’s also a bad idea to assume your loved one knows what to do.

Make sure you’ve addressed estate planning.  You need to ensure that your family member has the proper heath care directives and has established the necessary powers of attorney.

And finally, be proactive. Too often families only take the required steps once the problem has become painfully obvious.  You can take steps to protect your loved one before the problem becomes critical, if it ever does.  It’s not an easy conversation to have, but it’s worth the initial discomfort.

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