Reading my story on this blog, you might think I’ve got it made.
Thanks to a high-paying job and relatively frugal lifestyle, I managed to save a large sum by the time I was 50, and retire early. Since then I’ve pursued new interests, travelled extensively, and worked when and where I wanted.
Recently, we relocated to our dream retirement town. During all of this, thanks to the recent bull market, our portfolio has kept growing.
So, thanks to my upbringing, some good fortune, and hard work, I managed to live out a scenario that many people dream of. And I’m truly grateful for that.
Life is good and I have no worries, right?
Sort of. Just because we’re financially secure, doesn’t mean we’re insulated from pain. Life still happens. Loved ones pass away; things break; some days it rains. Even on the financial side, all is not roses….
In the short term — the next decade or two — I have few worries. We can deal with whatever comes our way. It’s the same financial position we’ve been in since our early married years, when we paid off our debt and began saving aggressively. The security of knowing you can call your own financial shots for years to come feels great.
But, in the long term, I have concerns. What will the world be like decades from now? Will we have enough to live comfortably to the end of our days? I can’t predict the future any better than anyone else. I don’t know what inflation will do to our savings. I don’t know how the stock market or government will behave in the years ahead. I don’t know how long we’ll live.
So the fact is, that despite our relative financial security, I do have worries. Let’s dig a little deeper into some of my top concerns — they may be on your list too — and see if we can understand them better….
Topping the list of fears for almost every retiree I know, myself included, is the cost of health care.
Recent positive headlines about a possible historic decrease in health care inflation have not yet erased a decades-long trend in my mind. Until the 2008 financial crisis, health care costs outpaced overall price inflation for three decades. At times, health care inflation averaged nearly 10% — compared to a long-term average inflation rate in the neighborhood of 3%. Even in 2012, a year that some are citing as evidence there has been a containment in health care costs, health care inflation was approximately twice that for overall consumer goods.
The math behind higher health care inflation rates is frightening. If health care starts out at 10% of your budget, but it inflates at twice the historical rate of inflation experienced by the rest of your expenses, then at the end of a 30-year retirement, health care is costing you over 20% of your budget. And should health care inflate at three times the rate of your other expenses, which has been the case in the recent past, then it will consume nearly 40% of your budget at the end of a 30-year retirement! And that is assuming you have unlimited funds to pay such expenses. The vast majority of us simply wouldn’t have the means to keep up with that kind of punishing rise in prices. We would forego healthcare, go bankrupt, or both.
Let’s hope that high-inflation scenario doesn’t materialize. The recent news is certainly encouraging. But it’s still early to assess the long-term trend. One reason for the recent lid on health care inflation is that health insurance has become less generous: putting more burden on patients to economize. Another is that the government has instituted cost savings in Medicare as part of Obamacare. In some cases, insurance companies and health care providers are shifting the costs of savings to those not on Medicare. In other cases, Medicare patients are being denied care. So it’s not perfectly clear yet whether health care costs are plateauing, or just being shifted, along with a reduction in care.
Regardless of national trends, all that really matters is the state of your own pocketbook. And, by that measure, the news on our own health care expenses in the first six months of full retirement, has not been good.
As I’ve written about previously, Caroline joined me in retirement in August 2013 and we rely on her health benefits as a retired public school teacher. We have to pay for those benefits, but it’s a group plan. For the first four months of her retirement we paid $559/month in premium for a high-quality Blue Cross/Blue Shield plan plus a bit of dental insurance. Now, in the new year, that rate has shot up to $634/month. That made for a shocking 13% increase in our first year!
We can handle such an increase once, or a few times. But, if it is part of a long-term trend, it will have a serious, detrimental impact on our retirement lifestyle. If it keeps up, our health insurance costs will double in a little less than 6 years.
As I was approaching the retirement decision three years ago, I had lunch with a trusted friend who was a financial advisor. I wanted him to review the details of my decision, play devil’s advocate. I knew from experience that he was more conservative than me in some departments, but less so in others. Altogether, he’d bring a different viewpoint to the table. We discussed my assets and expenses for a few minutes, and he concluded I was good to go. We finished eating and were about to rise from the table, when he said: “What about long-term care insurance? You’re a little young, but you really ought get a quote….”
I was not a stranger to the topic. Our parents have had long-term care insurance, in various forms. I’ve read a number of articles on the subject, and looked into prices for it in the past. But I wasn’t ready to pull the trigger then, and I’m still not.
For starters, these policies typically require underwriting, and I wasn’t up for negotiating the pre-existing conditions quagmire, prior to Obamacare. Secondly, the policy terms were unappetizing. Premiums can run to many thousands per year. Yet these policies don’t eliminate the cost of long-term care, as the salesman would like you to believe. Rather they typically pay a proportion of the expense, for a designated time frame (usually a few years). Lastly, a number of prominent insurance companies have actually exited the long term care business, because even those unsavory terms have not proven profitable for them.
I’ve already described my penchant for self-insuring whenever possible. Several experts have suggested that if you have assets in excess of $1M you may be able to self-insure for long-term care. Oblivious Investor reports on a study showing that 82% of people will have long-term care costs under $25,000 — a sum unlikely to wreck the finances of anyone who is financially independent.
I’m a big fan of do-it-yourself financial solutions, so self-insuring remains my default route of choice — long-term care included. But that doesn’t mean I don’t worry about long-term care. I do.
The U.S. Department of Health and Human Services reports that 70% of people turning age 65 will need some form of long-term care during their lives. There are entirely plausible scenarios where the expense of long-term care could bankrupt us. If I could wave my magic wand, qualify for and afford a policy that I trusted, confident that a significant portion of our long-term care expense would actually be covered, would I elect long-term care insurance? Sure.
So health-related expense concerns head my list of early retirement fears, as they do for many others. But, other than the jolt in our insurance premium, those expenses have yet to materialize fully. Meanwhile, a more imminent concern, because it’s expensive and nearly certain, is emergency travel. For example, just recently we had urgent family business and had to drop $2,500 on short notice to fly across the country, rent a car, and then fly back a couple weeks later.
I don’t begrudge this expense, but I do have to prepare for it. It’s part of life, and especially part of our life since we have chosen to live out west, while much of our family remains back east. Unfortunately there is simply no location in the country that would be close to all our family members. Our families and the various generations are spread out, geographically. So occasional emergency travel is a given for us.
That recent expense was about half our annual travel budget. With the stock market doing well, some extra income coming in from this blog, and other sources, I’m fortunate not to need to count those pennies — this time around. But what if there was an ongoing need over a period of months to travel back and forth to care for a family member? Those costs could quickly enough become unsustainable.
In a worst case scenario, we could have to relocate in order to reduce travel costs. We could afford that, if absolutely necessary. And it’s one reason we’ll continue to rent for the foreseeable future.
Other Unexpected Expenses
Emergency travel is currently the most prominent of my unexpected expense concerns, but there are others. Fortunately, by renting instead of owning our home at this stage of life, we have eliminated one major potential money drain: home repairs. I no longer lie awake at night worrying about roof leaks, furnace breakdowns, or driveway cracks. But there are other concerns….
We still have possessions that could require sudden repair or replacement. Vehicles lead the list. Our sturdy and reliable Prius costs us a few hundred dollars in repairs from time to time. That frequency will probably go up as the odometer crosses the 100K mileage mark. Our trusty camper van is basically a house on wheels, with the same systems and maintenance issues of a stationary money pit, just on a somewhat smaller scale. At the end of our most recent camping season, as I was preparing to winterize our rig, a critical and hard-to-repair water valve sheared off in my hands. Sigh.
Though we are well able to afford repairs to our vehicles now, even replacing a car if needed, these are large expenses that are difficult to budget. What if we have a string of “bad car” years coupled with a need to drive more? That could get very expensive and strain our resources.
As a precaution, at this stage, we intend to drive our existing vehicles into the ground, wringing every last cent of value out of them. Gone are the days of driving recent model cars with perfectly manicured bodies. Trusty, unpretentious transportation will be our watchword.
Real Stock Returns
When I retired in 2011, I used the classic 4% Rule as one of my tools — though not the only one — to analyze whether I had enough money. That was largely before the spate of research over the last several years exploring whether the 4% Rule has been an historical anomaly.
Given recent high market valuations and low yields, the passing golden era of American leadership in the world economy, and the historically unprecedented involvement of the Federal Reserve in the U.S. money supply, it would be wise not to expect generous real returns from the stock market going forward. Growth could stagnate. Inflation could take off. And that would mean you’d need much more in savings to support a given lifestyle in retirement.
I’ve been blessed with a bull market in the initial years of my own early retirement. That’s one of the most beneficial retirement tailwinds you could ask for. But it’s not under your control. Even today, it’s not a given, and could end at any time. It’s been great watching our portfolio grow, even as we withdrew for living expenses in early retirement. But that happy trend will surely reverse eventually. How much and for how long? Nobody knows. What I do know is that when it starts, I’ll be thinking “Here we go again.”
I’ve experienced a number of deep market downturns and I know not to change my long-term investment strategy in response. Still, after a few months, I’ll be feeling, “It’s time to watch our budget closer, maybe tighten our belts.” And, if the downturn goes on for years, I’ll be taking more stringent measures. We will still be solvent — able to meet our basic lifestyle needs — for decades into the future, under all but the most dire scenarios.
But that doesn’t mean I don’t worry. I’d love to guarantee our current lifestyle. But, I can’t. Because I don’t control the future.
Surveying the Unknowns
So I’ve talked openly about some of my financial fears in early retirement: health care, long-term care, emergency travel, unexpected expenses, and real stock market returns.
A common thread running through each of these potential concerns or expenses is their unknown nature. Most can’t be predicted or even estimated in advance. What will health care cost in the future? How long will you live and how healthy will you be in your later years? What will the stock market return in the next decade?
Can such questions be answered? They look inherently unpredictable to me. The way I see it, there are two possible approaches to the problem….
A select few individuals will work long enough and/or save enough that there is little question of being able to afford whatever comes in retirement. Though everybody’s situation is different, as a very rough estimate, we are talking multiple millions to get to that level of confidence — even given a relatively frugal lifestyle.
The second approach is to save enough for financial independence if current conditions hold, while implementing an early warning system so you are prepared to deal with any drastic changes in the economic environment.
What should you most watch for? Emergency expenses like the ones I’ve described are stressful, because they are a surprise. Given a family emergency or a vehicle failure, you can be out thousands of dollars overnight. But, those kinds of expenses, unless they repeat regularly, don’t usually threaten a well-financed retirement.
The real threats are significant changes to your baseline income or cost of living. And that’s where market returns and health care expenses loom. These factors can potentially bring about 25% to 50% or greater changes in your lifestyle during retirement. And that’s a truly frightening prospect.
On a positive note, major retirement lifestyle changes shouldn’t happen overnight. If you’ve structured your retirement assets and expenses properly, you will have adequate warning. You may not be able to fully insulate yourself from changes in the long run. But you can at least soften the blow and absorb them over time, instead of all at once.
If we find our retirement derailing due to unexpected expenses or dramatic changes in the economic or political climate, what are our options?
Late in retirement the options are few, and that is scary. It’s one reason I’m personally resolved to arrive in my later retirement years with more assets than I have now, if at all possible.
That’s a feasible goal because earlier in retirement you have better options for coping with financial change. The leading choices are part-time work, and lifestyle flexibility. So, if you find your retirement headed in the wrong direction, yet you’ve maintained your professional viability, you can generate more income on the side. And, if you’ve maintained options for a prudent and flexible lifestyle, by not locking yourself into expensive amenities, you can cut expenses: relocating, downsizing, traveling less, for example.
Ultimately, the only solution, the only antidote to fear of the unknown, is to remain alert. Continue to track your net worth and run retirement calculators. Detect problematic trends early, before they threaten your lifestyle, then take positive action on either the income or expense side, or both.