Health, wealth and happiness … the three go hand-in-hand. If retirees want to achieve all three, it’s important they act now to protect both their health and their wealth. Tony Drake, CFP® and financial advisor Brad Allen talk about how to help achieve these goals.
A new study shows having wealth and suddenly losing it can be hazardous to your health! Researchers found that people who lost at least 75% of their wealth in a short period of time had a 50% increased risk of death within the next two decades. A sudden loss of wealth can have a significant impact on a person’s physical health because of stress-related illnesses, but also on a person’s mental health with an increased risk for anxiety, depression or substance abuse.
A loss of wealth can aggravate physical problems and may also affect a person’s health by skipping expensive medical procedures or leaving prescriptions unfilled. While no one can predict your future, there are things you can do to protect your nest egg from major losses.
Protect Your Wealth
While most people have access to a 401(k) or other employer-sponsored retirement account, it is important to diversify your investments. Diversification is one of the best tools to protect your money from market volatility. There are two types of diversification to consider. The first is your asset allocation, or how much of your portfolio is in each asset class. The closer you get to retirement, the less money you want in riskier asset classes like stocks. That’s because stocks can be more volatile than other asset classes, making you more susceptible to loss if the market goes south.
The second type is diversification within each asset class. For example, if half of your portfolio is in stocks, be sure there is a balance. Consider small-cap and large-cap stocks, international markets or a mix of growth-oriented and value-oriented funds. The same goes for bonds. Not all bonds are created equal.
If you are nearing retirement, it is critical that your portfolio reflects this stage in your life. The closer you get to retirement, the more important it is that your money is safe. If you do suffer losses from a market downturn, you no longer have the time to recover like you did in your 30s and 40s. Depending on your comfort level, your investments can be riskier when you’re in your 20s and 30s. This is the time in your life you are trying to accumulate and grow your wealth. When you are in your 50s and 60s, the focus should be on preserving your wealth.
As always, you want keep rebalancing your portfolio. For example, say 55% of your portfolio is in stocks and 45% is in bonds. If those stocks have a good year, the gains could push your portfolio mix to 60% stocks. That may be too risky for your age and how close you are to retirement. You may want to rebalance to move some of that money back into bonds to maintain the appropriate risk. It’s best to consult your financial professional to make sure your portfolio has the proper risk and diversification for your age.
Avoid Emotional Investing
It’s easy to get caught up in your emotions when the market is hot or to panic when stocks take a nosedive. Fear and greed are the driving forces behind a lot of financial decisions. People are afraid when stock prices drop and get greedy when stock prices are up. These emotions cause investors to buy high and sell low, reducing their overall returns. Avoid making emotional decisions based on the stock market. Proper planning will help you stay the course knowing that each investment has a purpose to help you reach your long-term retirement goals.
Protect Your Health
Healthcare will likely be one of your biggest expenses in retirement. If we can stay healthy, we can keep more money in our pockets. Healthcare expenses need to be part of your retirement plan. There are a few strategies you can look into now that will help pay for health-related expenses in retirement.
Save in a HSA
It’s estimated that Medicare only covers about half of retirees’ healthcare needs, and premiums and out-of-pocket expenses go up over time. A health savings account is a tax-advantaged savings vehicle you can use at any age to pay for qualifying healthcare expenses. To qualify, you must have a high-deductible health insurance plan. People contribute to a HSA to fund current healthcare costs, but the balance carries over each year and that money can be invested to grow for the future. HSAs are a great retirement savings tool because you withdraw the money tax-free for qualifying medical expenses. If you are 65 or older and need to take the money out for another reason, it will be taxed but you won’t pay a 20% penalty. These accounts also do not have required minimum distributions at age 70 ½ so the money can keep growing until you need it.
Optimize Social Security
Having a plan for Social Security is one of the most important things you can do when retirement planning. That’s because the age at which you claim your benefits will impact you, and possibly your spouse, for the rest of your lives. Age 62 is the earliest you can claim Social Security, and it’s the most popular age to tap into those benefits. If you take Social Security before you hit full retirement age (which is 66 or 67 depending on the year you were born), your benefit is permanently reduced. If baby boomers can hold off until age 70, their monthly benefit can increase by 32%.
Deciding when to take Social Security is highly personal. People who decide to take their benefit early may be out of the workforce already, or might not expect to live past age 75. Whatever the reason, it’s important to strategize when you will tap into Social Security. The decision not only affects you, but also your spouse. A surviving spouse is eligible for their partner’s benefit if it’s higher than what they are already receiving. Be sure you and your financial professional have come up with a Social Security strategy before you turn 62.
Consider Long-Term Care Insurance
The life expectancy for both men and women has increased more than 10% since 2010. Living longer will cost us more. Statistics also show 70% of 65-year-olds will require some form of long-term care later in life. Long-term care expenses, and the need for long-term care insurance, will vary from person to person depending on their overall health and life expectancy. The average cost of a private room at a nursing home is more than $92,000, with the average stay being 2 ½ years. An insurance policy or an annuity rider can help fund long-term care needs. It’s important you discuss your wishes with your spouse and family members now. Sit down with your financial professional to determine if long-term care insurance is right for you.
The Retirement Ready radio show is featured every Saturday on WTMJ 620 AM at 1:00 pm. We will bring you information on: Social Security options, retirement trends, options to retire with life changes and achieving a secure financial future. Listen live here: WTMJ 620AM LIVE
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Drake & Associates does not offer tax or legal advice.
Advice and opinions expressed during Retirement Ready are solely that of the hosts or guests of Drake & Associates, LLC and not WTMJ Radio or The E.W. Scripps Company.