Hey there everyone. Welcome to this week’s episode of the, Her Retirement podcast. I am your host, Lynn Toomey. This week, we’re talking about worry, reluctance, risk and getting her done. At Her Retirement we’re very research based. And as a result, I like to base much of what I talk about on my podcast on industry research. This week, I summarize some key points from a 2021 study conducted by Allianz Life Insurance Company of North America. The study is entitled the retirement risk readiness study. Here’s a few key findings I’m going to dig into today. Number one, Americans are more worried than ever about a variety of retirement risks in 2021, including concerns about healthcare costs, the rising cost of living and the impact of a market downturn on retirement savings. People are most interested in getting professional guidance about how to prevent running out of money before they die and understanding the impact of a market downturns impact on their savings and close to 70% of study.
Respondents said they prefer financial products and strategies that help protect from big losses but come with smaller gains over financial strategies and products that have the potential for bigger gains, but also bigger losses. Although the impact of the COVID-19 pandemic has many Americans feeling more worried about the health of their finances and retirement savings. Most are reluctant to discuss these concerns with their financial professionals. If they have one, according to the study from Allianz respondents reported increased worry in 2021 regarding a number of different retirement risks, including, like I said, concerns about health care costs, 71% versus 65% in 2020, the rise in cost of living 67% versus 59% in the 2020 study, the impact of a market downturn on retirement savings, 66% versus 54% in 2020, and running out of money before they die up 29 up 59% versus 56% in 2020. However, among respondents who currently work with a financial professional, approximately two-thirds indicated they’re not currently discussing these topics, but would welcome that conversation.
The issues people are most interested in getting this professional guidance on include running out of money before they die at number one 66%, the impact of a market downturn on their savings at 64% being too conservative and investments and missing out on market gains at 63%. In addition, more than half said, they would like to discuss concerns about their high healthcare costs at 59% of respondents, 58% want to talk about the rising cost of living and lack of funds to do all they want to do in retirement at 57%. I think it’s absolutely crazy that traditional financial advisors are not having these conversations and not addressing these risks with clients. This is what clients want to talk about. So why aren’t financial advisors having these conversations? Well, I have my opinion on some of those things, but at Her Retirement, we make sure that everyone, we either teach, coach, advise, not only understand these top risks, but have open and honest conversations about how they impact their particular situation and what they can do before retirement to mitigate these risks.
If they’re already retired, we can help guide them to risk adjusted outcomes as well. Sadly, if people don’t feel comfortable talking about these issues, it’s unlikely they’ll take any action to address the various risks that could jeopardize their retirement. My mission at Her Retirement, working with women, is to change this narrative. The retirement risk readiness study surveyed three categories of Americans to get different perspectives on retirement. Pre-retirees, those 10 years or more from retirement and near retirees. Those within 10 years of retirement, and those who are already retired. Although the study found a clear opportunity for financial professionals to assist pre and near retirees, retired respondents reported less anxiety about various risks to their retirement. Even though already retired, people were less concerned about these risks. A closer analysis of the study reveals a distinct difference between those who are recently retired less than 10 years into retirement and retirement veterans.
Those who have been in retirement 10 or more years, the differences were in terms of both their level of worry, as well as their willingness to get professional help. Recently retired respondents reported feeling significantly more concerned about the majority of retirement risks when compared with those who have spent more time in retirement, including health care costs being too high, the rising cost of living the impact of a market downturn on savings and running out of money before they die. There’s really a 20% difference between the two groups. One bright spot is that recently retired Americans are more willing to discuss these topics with a financial professional. For those that reported interest in discussing retirement risks, the most popular topics with the impact of market volatility on retirement savings, running out of money and inflation. Another notable study finding that reflects the increased level of worry Americans are feeling about their finances. This year is a clear preference for retirement strategies that focus on protection when asked whether they would rather have financial strategies and products that have the potential for big gains, but also potential big losses versus strategies and products that protect from big losses, but come with smaller gains, nearly 7 in 10, or 68%, said they would prefer the protection product for this reason, and many more. I created a personal pension in protection plan that seeks to fill this need smaller gains, much better protection. I know firsthand how much peace of mind comes from having a pension. My mother who’s been retired from teaching for 20 years has lived a comfortable and confident retirement knowing her pension paycheck will show up in her bank account every month. And although she doesn’t have dental insurance, she has great health care, taking that concern and risk off the table for me, as her child.
I, to have some peace of mind that my mother’s financial well-being is protected, and this extends to her mental wellbeing as well. This is yet another reason I wanted to create a plan for women who may not have access to a pension program, such as one from a teacher or for those who want to augment a potential pension they’ll receive, or that they are receiving. You can create a personal pension and protection plan that helps you guard against market volatility, inflation, and healthcare risks, and what I call portfolio overdraft risk and tax risk portfolio overdraft risk, by the way is just another name for running out of money. It’s also a great plan to mitigate the effects of the fourth risk, which we women are particularly concerned with, which is longevity risk. Now I want to dig a little deeper into each risk and give you a few tips on how to mitigate these risks.
So let’s start by talking about healthcare. Americans are increasingly worried about healthcare costs as they approach retirement. About 70% of those surveyed said, this is a concern for them. And according to Fidelity, the average couple retiring in 2021 will spend $300,000 on out-of-pocket healthcare costs alone in retirement. A health savings account or HSA, not to be confused with an FSA, is a great way to start mitigating the risk of healthcare costs. And HSA is part of my personal pension and protection plan. HSEs are available to anyone with a high deductible healthcare plan, and the funds can be invested to be used later for healthcare costs or those costs in retirement. Many corporations offer their employees access to an HSA. And if your company does, I highly recommend you take advantage of it. If you’re self-employed, you can also open an HSA through a number of companies, including Fidelity, some local banks and HSA focus companies such as lively.com, health insurance policies that have annual deductibles of at least $1,400 for individuals and $2,000 dollars for family coverage qualify for high deductible plans.
Also the plans maximum out-of-pocket expense must be less than $7,000 a year for individuals and $14,000 for family coverage in 2021 and 2022, it increases to 7,050 for self only coverage and 14,100 for family coverage. Premiums don’t count as out of pocket costs, but deductibles co-payments and co-insurance due for 2021. The annual contribution limit to an HSA is 3,600 for individuals and 7,200 for families. While in 2022, that will increase to $3,650 for individuals and 7,300 for families. And when you turn 65, the money in an HSA actually just becomes qualified retirement funds and can be used for any purpose penalty free. You can also make a one-time penalty and tax-free rollover of money from your individual retirement account to a health savings account. The process is officially known as a qualified HSA funding distribution, and it was made possible by the health opportunity patient empowerment act in 2006 note, there is a testing period that requires you to remain eligible for the HSA for at least 12 months, following the rollover.
And another very, very important benefit of an HSA is it’s triple tax free. It’s the only investment that goes in tax-free, comes out tax-free and the money that you take is tax-free, huge, huge benefit. One of the best investments you can make as part of your personal pension and protection plan. Next, I want to talk about inflation or the cost of living. Inflation has become a big concern, especially as Americans slowly come out of all of these pandemic restrictions, however, inflation can be mitigated by putting your money in the right places. You’ll need to focus on products that provide returns higher than inflation. And these are typically stocks and other investments, and these should be a key part of that personal pension and protection plan or your portfolio. They are amazing hedges against inflation. Your investments need not be aggressive in order to be a good inflation fighter.
Some people will use ETFs, exchange traded funds, to help offset inflation. They’re a little lower risk because they’re more diversified, probably the last place. However you want to keep large sums of money is in a savings account because bank interest rates are not keeping pace with inflation. Some money as an emergency fund is important to keep in a bank savings account. And you just have to understand that it’s for emergencies and it’s okay that it’s not keeping pace with inflation because you need ready access in case of an emergency. Make sure you’re intentional and maximizing your returns so you’re not losing money to inflation. Next, 66% of Americans are worried that their money won’t be there when they need it due to market volatility, specifically, a market downturn. While market volatility is a concern for many, it’s far less worrisome the younger you are because you have plenty of time to make up for what the market’s ups and downs.
And it’s important to note the average tenure stock market return for the past 140 years was 9.2% according to Goldman Sachs. But as you approach retirement, you want to pay close attention to how you plan to mitigate volatility. Many retirees prefer to de-risk their portfolio, and put more money into vehicles such as annuities, which have no downside risks, but still offer some return of the market. Let me ask you a question. Would you want to retire into a 2008 and still have a significant portion of your portfolio in the stock market? I guarantee the answer is no a key way to minimize your stress about your portfolio and volatility is to measure your risk tolerance, educate yourself about the options and create a plan with, or without an advisor that you’re comfortable with align your risk tolerance and retirement goals. Doing this will go a long way toward reducing your worries.
My personal pension and protection plan helps mitigate the effects of inflation and market volatility with an ideal combination of growth from stocks protection, from annuities and income from what’s called guaranteed income benefit riders, or G M I B. The combination of each element in balance with your personal risk, tolerances and preferences can be scientifically and data backed, proven to offer you the best potential retirement outcome. Another important risk I want to add to this conversation is longevity risk, which is more relevant to women. Since we statistically live longer than our male counterparts, longevity in and of itself, shouldn’t be a worry because you know, if we’re healthy, who wouldn’t want to live even longer, right? However, the longer we live, the more money we’ll need. And since we don’t have a crystal ball, it’s critical to plan for worst case, proper planning means integrating all challenges and matching your money with your vision for retirement.
And finally, a key risk not revealed in the Allianz study, but one done by Lincoln Financial is tax risk. Nearly one out of every $3 spent by high income retirees goes to taxes. According to the study, most future retirees would not anticipate the taxes would be among their highest bills, but this study has revealed a startling reality of the impact of taxes in retirement and tax risk. The LFG sponsored research surveyed retirees between the ages of 62 and 75 with annual household incomes greater than a hundred thousand dollars. The results provide a snapshot of affluent retirees, concerns, expenses, income, and tax planning, and eliminate gaps in individual’s understanding of why taxes matter in retirement taxes represent the greatest expense incurred by this group. These concerns are greater than many individuals plan for prior to retirement and are growing source of concern. Also many retirees are not very savvy about taxes.
The survey’s results also provide a foundation for taking action. So let’s get into some of the details. One key finding of the surveys that many of the respondents do not maximize their tax planning opportunities. In fact, they display a surprising lack of knowledge of some tax topics though. They have a strong interest in learning more about tax planning and new opportunities that may exist within things such as Roth IRAs, despite the significant impact that taxes have on respondent’s income, a surprising portion of retirees are unfamiliar with the specifics of their tax status. Even though the respondent’s average marginal rates are 26% and 7% for federal and state taxes, respectively, nearly 39% of respondents do not know their federal tax rates. And more than half at 58% do not know their state tax rates. Retirees lack of familiarity with tax rates is reflected in the weakness of their tax planning.
Nearly one quarter currently do nothing to minimize their taxes. Only 19% itemized deductions and 14% make charitable contributions as their primary method of reducing taxes. Only 2% identify some type of IRA as their primary way to cut taxes. Many retirees worry about taxes and feel dissatisfied with their pre-retirement tax planning. 45% of respondents are concerned about outliving their money because of future tax increases. Nearly one third indicated that in retrospect, they wished they had focused more on tax planning for retirement. Over 40% said, taxes are greater expense than anticipated for retirees. The message is clear taxes matter significantly. Their survey shows that approximately one out of every $3 spent in retirement goes to taxes. As noted earlier, one quarter of respondents do nothing to minimize their taxes, and many are not even familiar with their state or federal tax rates. So the first step is understanding the ways that taxes are detrimental to your retirement lifestyle.
In the meantime, retirees can benefit from the following actions. Number one, examine the outlook for tax increases and other demands on your retirement savings. Number two, become aware of the sources of taxation. Number three, use tax strategies to break the cycle of spending on taxes. They exist and professional tax help exists. And I’m not talking about your CPA because many CPAs are backward looking. They look at the past and report on it. What you need is you need someone to do forward-looking tax planning and not just tax planning on your, you know, on your specific tax return. I’m not talking about that. I’m talking about retirement tax planning. It’s very different. It’s a different discipline, requires a different skillset. I recommend a retirement advisor who is very well versed in tax planning at her retirement. We can connect you to those types of people. Taxes are another important risk that must be planned for, tax strategies are another critical component to my personal pension and protection plan at her retirement.
Our goal is to help you go from savings to security and the most intentional and intelligent manner with guidance, you can rely on whether you need some personal finance coaching, a fee-based plan from a CFP or advice from a retirement advisor or a tax plan, income investments, whatever it is, my team, and I can hook you up. We are here as your Retirementor. We are here to educate you, prepare you and help you plan. So my question is, are you ready to get her done? If so, reach out to lynnt@herretirement.com. Here’s to knowing more, having more and getting her done.
Check out the podcast episode here!