Chapter 5

The Risks of Living and Living Well

The bad news is time flies.

The good news is you’re the pilot.

—Michael Altshuler

Before embarking on a journey it is important to understand the guidelines for a safe and successful experience. The same is true when planning for retirement because (repeat after me) failure is not an option. In your years of retirement there are no mulligans or second chances. The day you turn on the spigot to your 401(k) or IRA, all of the rules change. Instead of contributing to your pool of funds, you’ll be taking funds out. Over the next 20 to 40 years, you will be dependent on this income stream you’ve spent a lifetime accumulating. I refer to this period as the Fragile Risk Zone.

The good news is that instead of contributing to your retirement fund, you’re finally going to start benefitting from distributions. The bad news is that you must understand and overcome serious risks that were not nearly as significant during the accumulation phase of your working years. Creating a RISK (Retirement Income Survival Kit) Blueprint™ will help to ensure that your money lasts as long as (or longer than) you do. In short, you need to ensure that your income streams are protected against the eight key retirement risks that you, and indeed all retirees, face.

Addressing Retirement RISK #1:
INFLATION RISK

The first—and some would say most threatening—risk to financial independence is inflation. Oddly enough, I learned about how much risk inflation poses in Vietnam.

In 1993, 18 years after the Vietnam War ended and the country became communist, I spent five weeks traveling by bus, train, and thumb from Saigon to Vietnam’s capital city of Hanoi located 700 miles to the north. I visited the Cu Chi Tunnels, a sprawling underground network of tunnels that secretly housed thousands of Viet Cong (VC) fighters during the war, Hamburger Hill, Monkey Mountain near Da Nang, China Beach, and perhaps the most infamous site in all of Vietnam, the Hanoi Hilton (Hoa Lo Prison) where American POWs including Senator John McCain were jailed and tortured.

Ever since a number of my friends’ fathers returned from the war that left them so traumatized that they would never discuss it, I’ve always reached out to shake the hand of any Vietnam veteran I’ve met. I look into their eyes and I sincerely thank them for their service. Maybe that’s why no place impacted me more than Khe Sanh. This base was home to 6,000 U.S. Marines and 5,000 airplanes and helicopters. The area was once surrounded by dense jungle; today the land is barren with only green grass returning to the undulating hills. The U.S. forces used Agent Orange to disintegrate every living organism in the region, thereby rendering the Viet Cong more easily detectable. As I looked around, I could barely conceive that 500 American and 10,000 North Vietnamese soldiers lost their lives there.

I wasn’t supposed to be in Vietnam, but I was too intrigued not to go. President Clinton had not yet signed the U.S.-Vietnam Bilateral Trade Agreement, so the U.S. trade embargo was still in place. Americans were not even permitted to enter the country as visiting was considered trading. So I was very nervous landing at Tân Sơn Nhất International Airport. How would the South Vietnamese react to an American considering that we had left them to face years of oppression from their northern countrymen? With more than a little anxiety, I explained to the customs officer that he could not stamp my passport. He understood and respectfully stamped a piece of paper instead, which he placed into my passport.

I had unofficially entered the Socialist Republic of Vietnam. People in the airport stared at me but no one seemed to be bothered by the only westerner in sight. Before I could even figure out how to find a bus or taxi to get to the city center, a handful of eager Korean men approached me. In broken English, they asked if they could hire me to be filmed in their motion picture documenting the Vietnam War for the South Korean market. I was an easy target as there weren’t too many westerners traveling to Vietnam at that time. They offered to pay me $25 to play the part of Lieutenant Gary B. Parker. This remains one of the most surreal experiences of my life. Within hours of fearfully walking off the plane, I was dressed in an American lieutenant’s uniform, standing outside the Rex Hotel on the streets of downtown Saigon. This icon was made famous during the Vietnam War when its rooftop bar became a well-known hangout spot for military officials and war correspondents.

Playing the role of Lieutenant Gary B. Parker.

From the other side of the roped-off street, large crowds watched the filming. They were all very interested in me, wondering if I was a famous Hollywood actor or an American officer. Either way, they wanted an autograph. The shoot went well into the night. I had no lines, but rode in a horse and buggy for endless takes as I drank Tiger Beer and used up five of my fifteen minutes of fame. I couldn’t imagine a more attention-grabbing introduction to Vietnam until the next morning when I acquired a visceral sense of what inflation truly means.

My favorite part of being in Vietnam was interacting with the children, most of whom had never seen a westerner.

The first thing I usually do upon entering a new country, besides starring in a motion picture, is to exchange money into the local currency. In 1993 there were no ATM machines in Vietnam so I carried Travelers Checks in my money belt which, hidden under my clothes, rested tightly around my waist. When I gave the bank teller $100, I received 2,083,333 Vietnamese dong. The largest denomination they had at the time was a 1,000 dong bill, so I left the bank with a grocery bag overflowing with over 2,000 bills. My facial expression must have revealed how uneasy I felt. How will I get back to my hotel with all of this money? Is this dangerous? Where will I put it once I get there?

Trying to stuff bills in my money belt.

The inflation rate in Vietnam that year was 37.7 percent. Although this may sound ludicrous, it is well below the 200 percent inflation rate the country had experienced a decade earlier in 1982. To put this in perspective, the United States has historically experienced an average annual inflation rate between 3 percent and 4 percent. Although inflation jumped as high as 13.5 percent in 1980, we have also experienced deflation, which occurs when the inflation rate falls below 0 percent as it did in 2009. By 1994 in Vietnam, 100,000 dong notes had been introduced in response to the incredible and sustained rates of inflation.

During the second half of your financial journey, it is critical that you be able to maintain your purchasing power. Simply put, inflation means that every year your money buys a little—or a lot—less than it did the year before. The current inflation rate of 3.5 percent may not sound like much, especially when we compare it to countries like Vietnam. But even this rate of inflation means that prices will double every 20 years. How does this impact your retirement?

Inflation erodes your purchasing power. Let’s take a look at inflation’s detrimental effects during a 30-plus year retirement. In 1980 the average new car cost $7,574. Today that same car costs over $30,000. In 1980 the average new home cost $62,900. Today the average cost of a new home is over $300,000.

Imagine retiring at age 60 with an annual income of $100,000. Twenty years later at the age of 80, you will need to withdraw $200,000 from your same retirement accounts just to maintain that same standard of living. This doesn’t even factor in additional costs of health care and possible long-term care expenses. If you happen to live to age 100, this figure will have doubled once again and you will need $400,000 each year to purchase what $100,000 purchases today. When clients find this hard to fathom, I share with them that they probably spent more money on their last automobile than their parents spent purchasing their first home. This is when they begin to see the daunting effects of inflation. Then I share with them that it is highly likely we are going to be entering an inflationary period as the Fed prints more bills and interest rates eventually rise, thereby triggering a related rise in the inflation rate. I don’t want to scare them, but they need to understand how down the line inflation can impact their bottom line by devaluing how much their money is actually worth.

One of my favorite television shows from childhood was “Gilligan’s Island,” the story of seven castaways deserted on a beautiful tropical island. Recently my wife and I introduced our kids to this goofy and upbeat show through Netflix. It is a joy to see them giggle incessantly to the silliness of Gilligan. His companions the Skipper, the Hollywood actress and the professor all bring back so many fun memories along with a sense of youthful innocence. Perhaps the most inspiring characters were “the millionaire and his wife,” Thurston Howell, III and Mrs. “Lovey” Howell. They lived in a Beverly Hills mansion, traveled the world and owned every material possession imaginable. I still find it perplexing how they fit most of it on the Minnow for their three-hour tour.

As millionaires they were accustomed to being waited on hand and foot. They seemed to not have any worries in their lives. Being a millionaire in the 1960s was something we could all dream of as it meant a lifestyle of complete luxury. Less than half a century later the concept of being a millionaire has dramatically changed. Although one should feel blessed to have a million dollars since most people in the United States and certainly around the world will never experience such wealth, have they really hit the big time like the Howells?

While $1 million was once a sign that you had arrived, plenty of people with up to $10 million today don’t think of themselves as rich. Many actually consider themselves middle class, according to survey work by the authors of the book The Middle-Class Millionaire. A few years ago, Barron’s published an article referring to families with under $25 million of net worth as “beer and pretzel” millionaires. Although most people would be delighted to be a middle-class millionaire, the lesson here is that as you plan your years of financial independence it is essential to have an investment game plan in place that will accommodate the damaging effects of inflation, especially since we’re all living longer and longer.

Addressing Retirement RISK #2:
LONGEVITY

Americans are not only living longer, they’re retiring earlier. I refer to this growing gap as the Age Wave. During the last century, our life expectancy has almost doubled. Not only are people living longer, the proportion of our older population in this country is also rising dramatically. Think about this: The U.S. Census Bureau states that the over-80 population is increasing five times faster than the overall population. By 2030, the demographics of 32 states will resemble those of Florida today.

Not only do more years of retirement now need to be financed, graying now means playing! Rocking chairs aren’t for today’s grandparents. Retirement will likely involve more planes, trains and automobiles as well as skis, stand-up paddleboards and golf clubs. According to the Congressional Budget Office, only about half of all those baby boomers will have enough to maintain their standard of living throughout retirement. It’s not luck that enables people to retire younger, travel, and enjoy themselves forever more; it’s planning. As we have discussed, relying on Social Security or a company pension used to be enough, but today your own retirement savings have become an increasingly important factor in how comfortable you will be in retirement.

As life expectancy grows, will you and millions of baby boomers have enough to live on? According to SmartMoney, in the span of just 65 years the average retirement has increased from 8.1 years to more than 20. Americans are retiring younger and living longer. According the National Center for Health Statistics, by the year 2050 about one million Americans will be at least 100 years old. Consider Jeanne Calment who entered the Guinness Book of World Records when she passed away in 1997 at the age of 122. Consider that last year Hallmark Cards Inc. sold 85,000 100th birthday cards.

I recently visited my beloved Great Aunt Lila and Great Uncle Marvin, the latter who sadly passed away shortly before the publication of this book. At the time, they resided at a pleasant assisted-living facility in Florida where they had moved following a successful career owning diners in Manhattan, New York. Upon entering the lobby I saw the photo board featuring the seven centenarians who also lived there. That was a clear message to me that our demographics are changing. You might not live until 100, but it is likely that you’ll have many years of living in retirement to finance.

Living to 100 may actually become the norm. According to the Census Bureau, by 2050 the number of centenarians around the world is expected to grow to 1,000,000. When I recently mentioned this statistic to a client, he stated with a grin: “A majority of the cars on the road will always have their blinker on and everyone will eat dinner at 4 p.m.”

My dear Great Aunt Lila showing me her friends over the age of 100.

Longevity means that planning for retirement will take on more importance than ever before. If we live to 100 rather than 80, the remaining six risks could have a damaging impact on our retirement nest egg. Of course, the key to a well-financed retirement circles right back to the financial planning process discussed later in the book. Since today’s advancements in medicine, technology and personal health are allowing retirees to live longer, a solid retirement plan should provide a lifetime income stream that accounts not only for traditional life expectancy, but well beyond. Lifetime income components are necessary in order to ensure that retirees’ assets stand the test of time. Given these facts, a critical component of your retirement planning focus needs to address the probability of success. It is imperative to know whether your income is going to outlive you or whether you are likely to outlive your income.

Your health has a lot to do with whether your money will last as long as you do. Of course, we can only control that to a certain extent. So in addition to taking care of our bodies, we need to ensure that we’ll have the resources in place should we need more care down the line than we expect.

Addressing Retirement RISK #3:
HEALTH/LONG-TERM CARE

Sadly, the escalating costs associated with long-term care during retirement can make the possibility of outliving one’s retirement income an unfortunate reality for many. Every one of us hopes to live to a ripe old age, enjoying good health, family and friends along the way. The luckiest of us will. But those who are less fortunate may have to deal with serious and often ongoing health challenges that tend to accompany longevity.

Statistics reveal that as we age, there is an increased probability of our eventually needing assistance with the most basic activities of daily living, such as bathing, dressing, and eating. This type of care—regardless of whether it’s in-home or at a facility—does not come cheap. This is a topic that has certainly been making national headlines. Though everyone hopes for the best, your health during retirement is unpredictable.

The truth is that most of us will need long-term care in our golden years. As unsettling as it is to consider the possibility of needing daily assistance, planning for those potential needs now can save a lot of money and heartache later. For a couple turning 65, there is a 75 percent chance that one of them will need long-term care and yet fewer than half have taken steps to prepare for this possibility. How will they pay for long-term care? Most Americans are grossly underfunded for their retirement and do not have enough in general savings. The average cost of a nursing home ranges from $85,000 to $120,000 a year, while hiring an aide to spend an average of six hours a day in the home can start around $40,000 a year.

At age 65, you qualify for the country’s largest health insurance plan: Medicare. But there’s a catch. Many wrongly believe that savings and government programs such as Medicare and Medicaid will cover the tab if needed. The biggest shock for people entering the Medicare system is learning that it won’t pay for custodial care in a nursing home. Medicare was designed to pay for acute illnesses and medical treatments. If you slip on the ice during your years of retirement and need a hip replacement, Medicare will take care of this procedure, but it won’t pay for someone to feed you or help you dress. So if you start suffering from dementia and you forget to turn off the stove and almost burn down your house, or if you can no longer bathe yourself anymore, you are not covered. Unless you have someone to care for you, you will wind up in an assisted-living facility to the tune of $70,000 a year, which you’ll have to pay for yourself. Only when you have spent all but your last few thousand will you qualify for Medicaid, which will then pay the nursing home bills. Even then, the rules are very complex. For example, you can give away money to your spouse or children to become poor enough to go on Medicaid, but you have to get rid of it five years before you enter a nursing home. This explains why family members provide most long-term care, and why there are 52 million Americans who function as unpaid caregivers.

If you are among the lucky minority, your former employer may offer continued health coverage for its retirees. However if you’re like the majority of Americans, this type of coverage will be unavailable. Therefore, if you plan to retire before you become eligible for Medicare, you will be responsible for purchasing personal coverage to fill the gap.

Even if you are eligible for Medicare, you need to allow for out-of-pocket costs to pay for premiums as well as services outside the plan’s scope, such as vision, hearing, dental, and podiatric care. Considering that most seniors need these types of care, the costs can add up. According to a non-partisan report published in December 2006, the average senior can expect to pay 27 percent of his or her income toward health care. Therefore, it is of great importance to figure in anticipated medical expenditures when working through your retirement budget.

Clearly many people underestimate the need and cost of long-term care. Why? I find that many people are in denial or believe their children will look after them. Yet in many cases, family members may not live near them or have the means to support them. Even if they do, most of us would rather not be a burden to our loved ones.

Since Medicare does not cover long-term care and many people can’t afford to pay for long-term care out of pocket without depleting their retirement nest egg, many pre-retirees are opting to buy long-term care insurance policies. Depending on the contract and issuing company, these policies usually begin paying the costs associated with long-term care once you become unable to independently perform several of the activities of daily living.

This coverage can free you from worries about extended medical care or potentially having to rely on your family members for care or money. Long-term care insurance will provide you and your family with peace of mind before and after needing long-term care. It also works to:

Unfortunately, many do not think about this insurance until they need it.

Although most people recognize the value of long-term care insurance, often the expense of buying a stand-alone policy deters them from seeking coverage. Some insurers now offer an alternative in the form of a long-term care or living care rider that can be attached to a permanent life insurance policy. If the owner ever requires care, the rider makes it possible to accelerate the death benefit of the insurance contract to pay for qualified costs. I suggest becoming educated on the ins and outs of long-term care so you can make an informed decision on what is most appropriate for you.

But Wait, There’s More

This is just the start when it comes to putting together your Retirement Income Survival Kit™. As we’ll see in the next chapter, to succeed you have to fully understand what you’re up against and then act accordingly.