We ask a certified financial planner what they can do about it.
According to a survey by PNC Financial as quoted in SeniorJournal.com, over half of all retirees fear running out of money in retirement. Low interest rates and savings, the uncertainty of Social Security, longer lifespans, and inflation have all added to the concern that retirees could outlive their money.
To help us understand the problem and some of the possible solutions, we contacted Clark Kendall. Mr. Kendall is one of a select few in the world to hold the designations of CFA, AEP, and CFP. He’s also the founder of Kendall Capital in Rockville, MD.
Q: There was a time when people were only retired for five or ten years. That’s changed and now planners warn of the ‘longevity risk.” Could you explain to readers what the longevity risk is?
Mr. Kendall: For example, a 65-year-old married couple has a 50% chance that one of the two of them will live to be 91. At age 65, the 10% highest earners (more than 100k) will live on average eight years longer than the bottom 10% earners. Smart, wealthy, well-educated people need a good financial plan now more than ever in history.
Q: With many people living into their 90s, how far out should a retirement financial plan go? Until age 90? 100? Farther than that?
Mr. Kendall: Smart, wealthy, well-educated people should have a financial plan that covers them until their 100th birthday party. The divergence of the have and have nots makes a difference not only with the income earned but also years lived.
Q: The Trustees for Social Security project that the trust fund will be out of money in 2033 and taxes will only cover 75% of covered benefits. How should our retirement financial plan accommodate that Social Security risk?
Mr. Kendall: On one side of the coin, Social Security is a promise to pay back by the US federal government. If the US government was to ever renege on a promise to pay US citizens, it could cause worldwide financial destruction. On the other side of the coin, Social Security was 100% tax free and then they made it 50% taxable income. Now, it is 85% taxable income. I would argue that by slowly increasing the taxable portion of Social Security benefits, they are slowly decreasing the benefits to Social Security recipients. I think everyone under the age of 50 should expect lower benefits from Social Security. We just don’t know how we will receive those lower benefits.
Q: Even with Medicare, uncovered medical expenses can consume a significant chunk of retirement savings. Is there anything that can be done to reduce that risk?
Mr. Kendall: This greatly depends upon an individual’s or couple’s financial circumstances. If a couple does not have a large financial means, they could and should buy long term care insurance. If they have financial means, they may consider stepping up retirement account distributions to match medical expenses. Properly timed, distributions from retirement accounts can be offset by medical expenses and thus distributions are tax free distributions.
Q: Inflation is always a wildcard in longer term projections. And, the rate of inflation can significantly increase the cost of our daily bread. What do you tell clients about adjusting for inflation?
Mr. Kendall: Long term investment products like stocks and real estate should be used to meet long term (10 years +) financial needs, which includes maintaining purchasing power. Intermediate investment products, such as fixed income securities, utility stocks and dividend paying stocks, should be used for intermediate financial needs (3-10 years). Short term investment products, such as money market, CDs and Treasury bills, should be used to meet short term financial needs.
The biggest mistake investors make is mixing investment products with investment needs. For example, you should not have money market and CDs to meet long term protection of purchasing power needs and you should not buy stocks for next month’s nursing home bill.
Q: You advise clients that they may need to work part-time early in their retirement. Why is that?
Mr. Kendall: We advise clients with the current assets they have, this is what they should reasonably expect to spend during retirement. Usually, it is the clients who say they want to live bigger than that and they will look for the opportunity to work part time during their retirement. Like so many things in life, there are pros and cons of working during retirement, and we simply show the clients their options. It is 100% their decision.
Clark Kendall has more than 30 years of investment management and wealth management experience. He is one of a few investment professionals worldwide to hold the CFA®, CFP®, and Accredited Estate Planner (AEP®) designations. Clark has been named one of the Washington metropolitan area’s top wealth managers by the National Association of Board Certified Advisory Practices (NABCAP) and the Washington Business Journal. Clark founded Kendall Capital in 2005.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He’s been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.