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Retirement Blindspots

Some life & financial factors that can be overlooked.

We all have a “blue sky” vision of the way retirement should be, yet it helps to plan for retirement with a little pragmatism. Fate may alter the course of our retirement in ways we do not currently anticipate. So as we plan for the next act of life, we may want to think about (and plan for) some life and financial factors that are often overlooked.

We may retire earlier than we think we will. Some of us envision leaving the workforce at “full” retirement age (66 or 67) so that we can receive “full” monthly Social Security benefits rather than slightly reduced monthly payments. Will that happen? It might not, according to data released this spring by the respected Employee Benefit Research Institute.

In EBRI’s most recent Retirement Confidence Survey, 21% of the respondents thought they would retire at age 65. Another 26% expected to retire at age 70 or later.1

These expectations may not correspond with reality. In surveying current retirees, EBRI found that only 6% had worked into their seventies. Only 9% had retired at age 65. Sixty-five percent of the respondents had left work before age 65, up from 61% in EBRI’s 2010 survey.1

We may see retirement as an extension of the present rather than the future. This is only natural, as we live in the present – but the present will not go on forever. Things change, and the costs we have to shoulder five or ten years from now may be greater than the expenses we face at the start of retirement. As many of us will likely be retired for 20 or 30 years, it becomes essential to take a long-term view of the retirement experience – which is why retirees may want to consider growth investing and long term care coverage.

We may face an insurance coverage shortfall. Some of us rely on employer-sponsored health insurance. If we have to retire before age 65, how do we insure ourselves until we become eligible for Medicare?

Beyond that basic question, we need to think about insurance from a couple of other angles. Will we need long term care coverage? It seems to get more expensive each year, but as medicine and health care continue to advance and evolve, the possibility of a gradual rather than sudden death may increase. The wealthy may have the assets to contend with long term care costs, but the middle class rarely does. In Genworth’s 2015 Cost of Care Survey, the median annual cost for a semi-private room in a nursing home is $80,300. In California, it is $89,396; in Florida, $87,600.2

Additionally, few pre-retirees have disability insurance. Some employers do provide it, but many do not. A small percentage of us will likely become disabled in our fifties or sixties, or become ill to a point where we cannot work for an extended period of time. If we don’t have disability insurance, how do we make ends meet? We may be tempted to draw down retirement savings.

Disability insurance and long term care coverage may prove more essential to retirement planning than many of us realize.

Age may catch up to us sooner rather than later. Generationally speaking, are we healthier than our parents and grandparents were? Anecdotally, it would seem so: we see people running 10Ks in their eighties, climbing mountains in their seventies, and so forth. Then again, we have diabetes and obesity plaguing American health.

Will we be able to manage our finances at age eighty? At age ninety? How long will we remain able-bodied? Many of us will live long and healthy retirements, but this is not a given. That means we need to find people we can trust to manage our finances and help us in our daily lives if we become mentally or physically infirm. Our estate planning should not dismiss such concerns.

We may be alone sooner than we assume. Many couples retire with a reasonable assumption that they will be together for some time – but something may happen to leave one spouse alone. As anyone who has ever lived alone realizes, a single person does not simply live on 50% of the income of a couple. Keeping up a house – or even a condo – could be arduous for an eighty-year-old man or woman. Driving is a concern. All this means that we may need someone or some group of people to care for us when our spouse is gone. Is that kind of support currently available? Could it be available twenty years from now? If not, what will take its place?

These are some of the blindspots that can surprise us in retirement. They may quickly affect our money and our quality of life. If we age with an awareness of them and recognize them in our retirement and estate planning, then we may be betterprepared when or if they emerge.

Warmest regards,

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Citations.

1 – finance.yahoo.com/news/when-americans-think-they-will-retire-ebri-162344633.html [4/21/15]

2 – genworth.com/corporate/about-genworth/industry-expertise/cost-of-care.html [8/18/15]

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Keeping All This Volatility in Perspective

These recent ups & downs are reminiscent of past Wall Street swings.

Fall might be anything but calm on Wall Street. Volatility is back, in a big way: the CBOE VIX has risen more than 105% since the end of July. Additionally, 11 of the 15 trading days ending September 9 were “all or nothing” days in which more than 80% of the S&P 500 moved either higher or lower. In the last 25 years, the index has not had a 15-day period like this.1,2

Contrast that with the first 159 trading days of 2015, in which just 13 such days occurred according to Bespoke Investment Group research. In fact, during the first half of 2015 the Dow Jones Industrial Average was never more than 3.5% up or down YTD, on pace for the most placid year in its history.2

Writing in the Financial Times, the noted economist and portfolio manager Mohamed El-Erian recently identified a few factors driving these market swings – factors that may not subside anytime soon. Fundamentally, he cited the “spreading economic slowdown” in China and other emerging markets “eroding a fundamental underpinning of high and stable asset prices” – and bursting some asset bubbles in the process. Markets can be roiled with the emergence of “major global challenges away from the direct reach of the U.S. Federal Reserve and the ECB,” he adds, as too many (institutional) investors look to central bank activity for either direction or reassurance. Lastly, investors worldwide are wondering if the Fed will raise short-term interest rates next week.3

So, this turbulence may persist for several more weeks or months. How does an investor cope with it? It helps to put all of this recent volatility into perspective.

Remember that historically, the ups of the market have outweighed the downs. If your time horizon is relatively long, this particular fact may provide encouragement: as Ibbotson notes, since 1926 there has never been a 20-year stretch in which a diversified portfolio invested in large U.S. firms has had a negative inflation-adjusted total return. From 1926-2014, such a model portfolio (with dividends encompassing roughly 40% of the total return) yielded approximately 10% a year on average.4

These recent ups & downs compare to others. On August 24, the S&P 500 lost 3.2% and was down more than 4% during the course of the day. That was quite troubling, but not quite extraordinary: it was the fifty-fifth day since 1983 in which the broad benchmark had dropped 3.5% or more in a trading session.4,5

How has the S&P recovered from days like these? Historically speaking, it has recovered more often than not. Looking at the 12-month periods after the preceding 54 such trading days, there were 45 year-over-year advances and 9 year-over-year retreats.  How far did the S&P fall, on average, during those 12-month retreats? The answer is 7.7%. How high did it rise, on average, during those 45 annualized ascents? A remarkable 27.6%. So while history tells us nothing of tomorrow, it does seem that the S&P has recovered amazingly well from the bulk of its major one-day drops in the last 32 years.4

After a long, steady ascent, it is easy to become lulled into thinking that the market only goes up. We all know differently, but even so it can be a rude awakening when the major indices rollercoaster or plunge. Even so, we should be patient rather than let emotion take over. As the late Paul Harvey said, “In times like these, it helps to recall that there have always been times like these.”6

Warmest regards,

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Citations.

1 – investing.com/indices/volatility-s-p-500-historical-data [9/10/15]

2 – cnbc.com/2015/09/10/this-market-is-setting-a-wild-volatility-record.html [9/10/15]

3 – cnbc.com/2015/09/08/why-higher-market-volatility-is-the-new-norm.html [9/8/15]

4 – tinyurl.com/oksgh26 [8/25/15]

5 – thestreet.com/story/13263507/1/stocks-end-brutal-week-as-market-nears-correction.html [8/21/15]

6 – content.time.com/time/arts/article/0,8599,1882444,00.html [3/1/09]