Are Happy Retirees Oblivious to the Risks They Face?

Retirees are generally a happy lot. For example, Retirement Realities: The Experience of Retirees, a recent study from the Transamerica Center for Retirement Studies (TCRS), reports that very high percentages of retirees are generally happy (89%), have close relationships with family and friends (88%), enjoy life (86%), and have a positive view of aging (80%). That’s great news for both retirees and the soon-to-be-retired.

---

However, the same TCRS study reports that many retirees are ignoring the risks they face with their finances and health. Instead of risking unhappiness down the road, it would be much better to plan ahead to address the common risks that retirees face.

Let’s ask five probing questions that help illustrate these risks.

How Will You Deal with a Financial Emergency?

Only one in three retirees in the TCRS study reported that they’ve continued to build an emergency financial reserve in retirement. More than one in four (27%) are just managing to cover basic living expenses.

About one in six retirees (16%) report no emergency savings, and almost one in three (31%) aren’t sure how much they’ve saved. The median savings reported was $13,000.

It’s inevitable that most retirees will face a sizable financial emergency—such as urgent home repairs, costly medical issues, car replacements, or long-term care—that strains their regular budget. “Many retirees are getting along and living within their means, but they may have difficulty withstanding costly financial shocks,” says Catherine Collinson, CEO and president of Transamerica Institute and TCRS.

Building a substantial emergency reserve is one of the best ways to be ready for an emergency. Other strategies include maintaining a Roth account that you don’t use to pay for ordinary living expenses or being willing and able to significantly cut standard living expenses.

What Will You Do When the Stock Market Crashes?

During retirements that can last twenty years or more, it’s fairly certain that you’ll experience a handful of stock market crashes. The trouble is, nobody has a crystal ball that can reliably predict when the market will crash. If you have significant retirement savings invested in the stock market, then you’ll need a plan to help you survive stock market crashes without knowing exactly when they’ll happen.

It would be best to develop and include this strategy in a written financial retirement plan, but only 22% of TCRS retirees have such a plan. A larger percentage (45%) have a plan in their head, but it’s doubtful that such a plan would address stock market crashes.

It would also be better for most retirees to work with a retirement advisor to develop strategies that will help them survive stock market crashes, but only a little more than one out of three retirees (38%) work with a retirement advisor.

What Will You Do When You Can No Longer Manage Your Finances

Almost one in three retirees (32%) fear cognitive decline, dementia, or Alzheimer’s disease. Unfortunately, the first sign of these conditions is often a financial loss, due to the retiree making a mistake regarding their finances or being a victim of fraud. To avoid these issues, it would be wise to develop a plan now for when you may no longer be able to manage your finances; if you wait, you might just wait too long. Such a plan should include a power of attorney for financial decisions, which fewer than half (41%) of the retirees in the TCRS study reported having.

For a guide to creating a robust plan, visit the website for the Thinking Ahead Roadmap: A Guide to Keeping Your Money Safe As You Age, sponsored by AARP and the University of Minnesota.

What Will You Do When You Can No Longer Live Independently?

One of many retirees’ greatest fears is the threat of the cost of long-term care, reported by 41% of retirees in the TCRS study. More than half of retirees (56%), however, reported that they’re confident they’ll be able to afford it.

But there’s a serious disconnect between retirees’ answers to questions about their plans to obtain long-term care and their financial resources. Almost half of retirees in the study (47%) plan to rely on family and friends. This could be a great burden on them—one they might be unwilling to take on, making this an unrealistic expectation.

Almost three in 10 plan to move to an assisted living community, one in four would use a professional paid in-home caregiver, and 11% would move to a nursing home. However, these solutions can be very expensive, well beyond the median emergency savings of $13,000 reported previously or even the median household retirement savings of $126,000. This later amount might typically only last about a year whether the retiree was in assisted living, with full-time paid caregivers, or at a nursing home. Only 14% of retirees reported having long-term care insurance, which could potentially pay for the solutions that retirees expect.

“A reality of growing older is that our health and abilities may decline to the point that we need help with daily activities,” says Collinson. “For retirees, this possibility is becoming more real as time goes by.”

All retirees should develop a plan to pay for long-term care, which might—or might not—include buying long-term care insurance.

Will Your Spouse or Partner Be OK When You Die?

If you’re married, it’s inevitable that one of you will outlive the other. Unfortunately, when one spouse passes away, the survivor’s retirement income often drops much more than their living expenses do, resulting in the “retired widow’s money crunch.” You can plan ahead for this situation by estimating the survivor’s adjusted retirement income and living expenses and adopting strategies to mitigate the damage.

Once again, it might be wise to work with a retirement advisor on such a plan and put it in writing. Unfortunately, as noted previously, not many retirees do this.

When—Not If

Note that the risks discussed here are preceded by the word “when,” not “if.” That’s because almost all retirees will face one or more of these risks in their lifetime. Whatever you do, don’t stick your head in the sand and think they won’t happen to you! Prepare for the future, so you’re ready when you face any of these risks.

Of course, it’s entirely possible for retirees to continue to be happy and also be worried about the risks discussed here. In this case—make plans! Then, don’t worry, be happy.

By Steve Vernon, Contributor