The first wave of the post-war baby boom generation reached age 65 last year, and finally started coming to grips with retirement realities. These are the same realities that anybody contemplating retirement in the foreseeable future must face. Unfortunately the news is not particularly cheery.
At best, modern retirement will be challenging. At worst, for those who didn’t prepare well in advance, it could be heartbreaking.
To compound matters, though the news is generally poor, none of it is very precise. In other words, it’s hard to say exactly whether those clouds ahead will be overcast weather, a steady drizzle, or a downpour!
In retirement planning, you’re dealing with the future — never a sure bet. Here are three prominent issues where uncertainty swirls:
Healthcare and the New Law
With decreasing employer coverage, soaring costs, and more restrictive underwriting, retirement healthcare before Medicare at age 65 is increasingly problematic. The Patient Protection and Affordable Care Act, passed in 2009, offers some hope for access to affordable healthcare for retirees. Key provisions of the law include a unified health insurance option available through state-based marketplaces, a ban on denying coverage or raising premiums due to pre-existing conditions, and a ban on dropping policyholders who become sick.
But the lawsuit by the states challenging the PPACA is in front of the Supreme Court as this is written. The key issue is whether the mandate requiring everybody to buy health insurance exceeds Congress’s authority. That requirement is of particular interest to early retirees, because it would likely expand the insurance pool, increasing access to health insurance, and reducing costs. Whether or not we’re going to have such an enforced national health insurance policy is now up to the justices, and a decision is expected soon. But even once we know the immediate outcome, the true ramifications for our healthcare options are likely to take years to play out.
New Research Into Safe Withdrawal Rates
If you retire with significant savings, but minimal pension or Social Security, how do you live off your savings? How do you know what you can spend each year without running out, given that you can’t predict future investment returns, inflation, or how long you will live? It’s a thorny problem. Simplistic answers such as "spend the average return on your portfolio" were disproven by the mid 1990’s. The first phase of serious research into safe withdrawal rates produced the "4% Rule" which has stood for more than a decade. It says that you can live on about 4% of your initial portfolio annually, adjusted for inflation, without fear of running out over a 30-year retirement.
But new studies are seriously questioning that simple rule. The issues are many: What if stocks and bonds are overvalued when you retire? What if you don’t spend the same amount every year? What if you put some of your savings into an annuity? The bad news is that, given current economic conditions, researchers are suggesting you should draw much less than 4% if retiring right now. But research continues, raising new questions, and perhaps leading to new solutions that combine safe withdrawal rates, annuities, and current market valuations, in an attempt to generate safer, more reliable retirement income.
Loose monetary policy from the Federal Reserve in recent years has now reached an unprecedented level. Today’s razor-thin interest rates and negative real returns are at historic extremes. Coupled with the government’s inability to spend within its means, many observers predict that severe inflation is all but inevitable. They make a strong case, one you’d be wise to take into account when planning for retirement. Inflation has the potential to rob you of investment returns and years of spending power.
But a puzzle remains: extreme inflation hasn’t appeared yet, and frankly doesn’t seem to be on the immediate horizon. The rate of inflation for the past 10 years, at 2.4%, is actually well below the historical average. And current fears tend towards economic contraction, usually associated with low inflation or even deflation. A reasonable conclusion would be that, while inflation remains a strong possibility in the future, it’s not an immediate threat. Trouble is, retirement time frames extend well into the period when severe inflation could become a problem. So, will it rise precipitously as many predict? And, if so, when?
Looking for a Winning Hand
Those are three of the most important, and most unpredictable, of the retirement wildcards facing baby boomers: healthcare, safe withdrawal rates, and inflation. With so many unknowns, and so much grim economic news on the horizon, pessimism would be understandable.
But, it is always possible that things could turn out better than expected. Parts of the new law could actually improve healthcare coverage and lower costs. New research may yield a hybrid retirement income model that will let us maximize our spending, while enjoying security and peace of mind. Inflation could continue, as it has for many years, to be tamer than predicted.
As you approach retirement, it’s wise to prepare for the worst, but continue to hope for the best. The current headlines have certainly dashed our simplistic beliefs in a rosy future. But, things don’t usually turn out as badly as imagined in our worst fears.
In most card games, the wildcard is an unknown quantity for only so long. Once it’s finally in our hand, we can play it to our advantage.…