Most wealth advisors are familiar with the financial risks in retirement, such as inflation, investments and interest rates. What is not as well known is that non-financial events pose as much, if not more, risk to the retirement security of their clients. These hard-to-predict events include pre-retirement shocks, health care, chronic care, longevity, and widowhood, any one of which can cause a serious blow to an otherwise solid plan.
Pre-retirement refers to the 10-year period before retirement. This is a busy time of life from a financial perspective. College expenses and home mortgages are being paid, income is peaking, and consumers are beginning to focus on saving for retirement.
But things often go wrong during late middle age. During the decade leading up to retirement, three of four married couples who are college graduates experience an event that could derail their retirement plans. The most common event (35% of couples) is onset of a major medical condition in the husband or wife, such as cancer, heart problems, a stroke or diabetes. Other shocks include a frail parent or in-law who requires physical and/or financial support (34%), health-related work limitation (24%), job loss (19%) and widowhood (5%).1
Job loss is especially noteworthy given today's difficult economic climate. A 2011 study by the Urban Institute reported that of workers aged 50-61 who lost their job in 2009, only one in four found a new job within a year. When they did, they often had to accept deep pay cuts that averaged 20 percent less than their prior salary.2
Further evidence of the frequency of these shocks was provided by a report from the Society of Actuaries. Four of ten people retire before they expected to, often because of poor health, job loss or to care for a spouse or other family members.3
Health Care Costs
Most people are surprised to learn that many healthy couples spend more money on medical care during their retirement than unhealthy couples. The reason is because healthy people live longer, eventually develop health problems, survive longer after an illness develops, and are more likely to need chronic care.4
These costs can be very high. Fidelity Investments estimates that an average 65-year-old couple retiring in 2011 will need $230,000 to pay for out-of-pocket medical expenses throughout retirement, not including nursing home care. And since medical costs are increasing faster than the rate of inflation, they will consume a larger percentage of retirement income in the future.5
One other uncertainty is Medicare. If policy decisions are made that decrease reimbursement for medical care during retirement, out-of-pocket medical expenses might be considerably higher than today.
Chronic Care Costs
Chronic care is care provided for those who cannot perform some or all activities of daily living, such as bathing, continence, dressing, eating, toileting and transferring. For people age 65 and older, 6 in 10 men and 8 in 10 women will need chronic care during their lifetime,6 mainly for Alzheimer's disease, stroke, crippling arthritis, Parkinson's disease, serious accidents and degenerative neurologic diseases.
A March 2011 report from the Alzheimer's Association highlighted the impact of Alzheimer's in our lives.7 There are 5.4 million Americans with Alzheimer's disease, and 15 million unpaid caregivers providing 17 billion hours of unpaid care to them. Over half (55 percent) of unpaid caregivers are the primary breadwinners of the household, 60 percent are women, and one in four family caregivers have children under 18 years old living with them.