October. 2024, Issue 2
THE 3 MAIN CONCERNS RETIREES HAVE ABOUT THEIR MONEY – AND HOW A REDLINE ANALYSIS CAN SAVE YOU FROM RUNNING OUT
Introduction:
Retirement should be a time of relaxation, travel, and enjoying the fruits of decades of hard work. Yet, for many retirees, money worries often cloud those golden years. A study by the Employee Benefit Research Institute found that 7 out of 10 retirees are concerned about outliving their savings.
But the good news is, there's a way to take control of your financial future before it’s too late: the Redline Analysis. In this article, we'll walk you through three key concerns retirees face and show you how a Redline Analysis can offer a life-changing perspective on your retirement plan.
Concern #1: Outliving Your Money
Let's be honest. No one wants to be 85 years old, healthy, and broke. This is the number one fear retirees have: that their savings will dry up long before they do. You’ve spent decades saving and investing, but how do you know if it’s enough?
Many people assume that their money will last if they follow a basic withdrawal strategy. In financial terms, this is called a Straight Line Analysis. You make a simple assumption: "If I take out $X amount per year and my investments grow at Y%, my money will last until age Z." But life rarely follows a straight line.
Enter the Redline Analysis.
Unlike the Straight Line approach, a Redline Analysis considers all the variables that could derail your financial plan. It looks at market fluctuations, inflation rates, unexpected expenses like medical bills, and how long you or your spouse may live. In essence, it shows you when you’ll run out of money if those “what ifs” actually happen.
Imagine driving your car without a fuel gauge. Sure, you might know how many miles you can drive on a tank of gas, but wouldn't you rather have a dashboard that tells you exactly how close you are to empty? That’s what a Redline Analysis does for your retirement. It gives you a clear, accurate view of how long your money will really last—adjusting for bumps along the road.
Concern #2: One Spouse Outliving the Other
If you’re married or in a long-term partnership, you’ve probably discussed how your retirement income works as a team effort. But what happens when one spouse passes away? The loss of a partner is heartbreaking enough without adding financial uncertainty to the mix. One major, often overlooked factor is that surviving spouses can face drastic reductions in income.
In many cases, the surviving spouse will lose one Social Security check.
Pensions may also decrease or disappear entirely. Add to that the emotional toll of losing a spouse, and suddenly, financial worries seem to double.
A Redline Analysis factors this in by simulating scenarios where one spouse predeceases the other. It calculates the impact of losing one income stream and how that affects the surviving spouse’s ability to maintain their lifestyle. This is a critical issue because most people don’t realize just how much their income might drop after the death of a spouse.
Let’s take a simple example. Imagine you and your spouse receive $50,000 a year in Social Security and pension benefits combined. If one of you passes away, that income could drop by 30%, leaving the surviving spouse to live on just $35,000. That’s a huge gap, especially when everyday expenses like housing and healthcare don’t change.
A Redline Analysis helps you prepare for this devastating life event by showing you how much you need to save or invest now, so the surviving spouse doesn’t end up outliving the remaining savings.
Concern #3: Long-Term Care and Its Financial Impact
But what happens if one spouse needs to enter a long-term care facility?
These costs are astronomical. The average cost of a nursing home is now over $100,000 per year. If one spouse requires this level of care, the couple’s retirement nest egg can deplete much faster than expected, leaving the healthy spouse with little to no resources for their remaining years.
This is where the Redline Analysis proves invaluable.
Unlike a Straight Line Analysis that assumes both spouses have the same financial needs throughout retirement, the Redline Analysis considers the devastating impact long-term care can have on a couple’s finances. It factors in rising healthcare costs and estimates how much you’ll need to cover long- term care without sacrificing the well- being of the surviving spouse.
Let’s break this down with an example. Suppose you and your spouse have $500,000 in savings. If one spouse needs long-term care for 3 years at $100,000 per year, that’s $300,000 gone from your nest egg. The Redline Analysis will show you the “red zone”— the point where your savings dip so low that the remaining spouse may struggle to pay for even basic living expenses.
The third major concern retirees have is long-term care. We all hope we’ll stay healthy throughout our retirement, but the reality is, as we age, the need for medical assistance and long-term care increases. In fact, the U.S. Department of Health and Human Services reports that nearly 70% of people turning 65 today will need long-term care at some point in their lives.
The Wildcard: Adverse Markets and Their Role in Redlining
If you thought the concerns above were frightening, consider this one: a market crash. Imagine retiring in 1999 with a healthy portfolio, thinking you’re set for life. Then the dot-com bubble bursts, followed by the 2008 financial crisis.
Between 2000 and 2010, the S&P 500 lost nearly 10% of its value. If your retirement plan didn’t account for such adverse market conditions, you could have run out of money halfway through retirement.
This is where the Redline Analysis really shines. It doesn’t just assume a steady return on your investments, like many outdated financial models. Instead, it factors in potential market volatility and
shows how your portfolio might fare in both good times and bad. You’ll know exactly when you could hit the “redline” and run out of money if the markets take a nosedive.
A Redline Analysis would have prepared retirees for the unexpected downturns of 2000 to 2010, giving them a better chance of preserving their nest egg. It allows you to see not just when you’ll run out of money in a normal market but also in a worst-case scenario. It helps you build a buffer, a safety net, to ensure that even in the worst of times, you’re still financially secure.
Conclusion:
Retirement is supposed to be a time of ease, not worry. But for too many retirees, the fear of outliving their money, the death of a spouse, long-term care costs, or a sudden market crash can turn those golden years into a period of anxiety.
The key is in planning. A Redline Analysis gives you a clear view of the dangers ahead, showing you not only where you stand now but also how your financial situation might change under different circumstances. By factoring in market volatility, life expectancy, healthcare costs, and loss of a spouse’s income, you get a complete picture of your financial future.
Don’t leave your retirement to chance. The time to act is now. Ask your financial advisor about getting a Redline Analysis and take control of your future before it’s too late.