Retirement won’t be enjoyable if you are constantly worried about outliving your money. Your first retirement planning goal should be eliminating this money stress. You can do this by financially preparing for worst case scenario retirement events that are reasonably foreseeable. These are three worst case scenarios that this baby boomer is planning for.
Scenario No. 1: Inadequate Retirement Income. When you stop working and your income is not guaranteed to meet your basic living needs, you are likely to experience retirement failure. To prepare for this scenario, you must first determine what your essential spending needs will be when you retire: housing, food, utilities, health care, etc. This can be done with a simple budget worksheet (found free online) or with your favorite budgeting software. Leave discretionary spending and inflation out of this baseline spending calculation. The second step is to match your baseline spending needs with anticipated sources of retirement income that are guaranteed. Typically, these will include pension and Social Security benefits. If your estimated guaranteed retirement income equals or exceeds your baseline spending needs, you are prepared for this worst case scenario. If the numbers don’t align, you are not ready for retirement. You have some work to do, such as saving to purchase a life income annuity when you stop working that will fill in the gap.
Scenario No. 2: Inflation Erosion. Inflation is a slow but lethal killer of retirement dreams. If the source of your guaranteed retirement income is inflation adjusted, as Social Security is, you are prepared. Otherwise, you will need assets in your retirement portfolio that will provide inflation protection. Don’t accept the conventional Wall Street wisdom that stocks, precious metals, and other commodities will provide this protection. None of that income is guaranteed. Market declines will stress you. Instead, start buying I Series Savings Bonds (outside a retirement plan) and Treasury Inflation Protected Securities (inside a retirement plan). Having a stash of these inflation-adjusted government bonds will help prepare you for this worst case scenario.
Scenario No. 3: Long-Term Care. We know that health care in retirement will be expensive. Medicare premiums and other routine health care costs should be including in your essential spending needs. The financial worst case scenario is a health care event that requires long-term care. Medicaid can provide some help for this but only after you have exhausted most of your personal assets. If you are not wealthy enough to self-insure, there are several strategies for preparing for a long-term care event. The first is to purchase private long-term care insurance, preferably a policy that meets federal Long Term Care Partnership regulations. Another strategy is to take advantage of the Community Living Assistance Services and Support Act, enacted with recent health care reform. The Class Act will be the first national plan to help working Americans insure themselves for future long-term care. A third option may be an annuity that includes a long-term care rider. These new products, sometimes called a hybrid annuity, can provide income protection when healthy and an income benefit during a period when long-term care is required.
While no one enjoys thinking about worst case scenarios, you must do it as part of your retirement planning. If you prepare for the worst now, you will be rewarded later with reduced stress levels and a long and happy life.
Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.