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Don’t Get Shortchanged by These Common Retirement Financial Challenges

Blog common financial risks in retirement

When it comes to lifestyle, it can be said that we have “two” lives – or rather two different life phases. The first phase is the working years, or when we work for a living. The second phase is retirement, or when we can choose to stop working, should we desire to, and do what we want. From volunteering or spending time with family to social gatherings, vacation getaways, gourmet dining, or personal luxuries, there’s no shortage of ways we can enjoy our time in retirement.

However, many Americans who are retired or nearing retirement face unique barriers – financial challenges which can keep them from enjoying the lifestyle they worked hard for. Preparation is key, so the importance of planning ahead can’t be overemphasized. Here’s a quick look at some common financial challenges to account for.

Common Financial Challenges

1. Household debt. One challenge that can stretch retirement finances thin is household debt. A study by the Employee Benefit Research Institute on American households aged 55 and older from 1992 to 2013 illustrates this. Research found 64% of retired and near-retired households had financial liabilities in 2013, up from 53.8% in 1992.

  • The biggest issue was mortgages and home-equity debt. 42% of households aged 65-74 were saddled with housing debt, a 24-point jump from just 18% in 1992.
  • Recent data from the U.S. Bureau of Labor Statistics helps confirm this – housing expenses, which include mortgage payments, was the biggest spending category for retired households in 2014.
  • Student loan debt is a surprising factor in retirement. According to the Government Accountability Office, senior citizens had $18 billion in student loan debt in 2014, up over 600% in less than a decade. Over 20% of the student loan debt was for helping children with educational expenses such as college.
  • In more recent statistics, credit card debt has proven influential. Among American households aged 65-69, average credit card debt is $6,876 – over 200% more than maximum monthly income payouts you can get from Social Security.

2. Low interest rates. For retirement income, many Americans draw on earnings from low-risk, interest-bearing assets such as bonds. However, interest rates have stayed at historical lows. Much of this was attributable to interest rate-setting policy by the Fed. For almost a decade, the Federal Reserve had kept interest rates very low to spurn business borrowing and consumer spending. But the low rate-setting reduced earning potential for interest-bearing vehicles like savings accounts and CDs, which diminished earnings income for retirees.

There has been talk of the Fed raising interest rates. But according to notable economists like Mohamed El-Erian, Fed officials have been hesitant to fully commit to a raise increase, given economic data indicators. This may mean that we may be in a low-interest rate environment for even longer, which affects dependable income from CDs, bonds, money markets, and other interest-earning vehicles.

3. Fears over stock market volatility. The financial crisis happened quite some time ago. But many retiring Americans can remember its aftereffects. Between September 2007 and December 2008, the stock market lost 47% of its value – an $11 trillion decline, according to the Urban Institute. Being worried about suffering losses and other concerns, older Americans have stayed on the sidelines and stuck with lower-risk vehicles.

In the article link about the Fed and El-Erian’s commentary above, El-Erian opines that the Fed should be worried about keeping interest rates low for so long. As interest rates stay low, asset prices become inflated and investors seek vehicles with greater market risk to receive higher returns. For Americans who are retired or approaching retirement, this could put hard-earned life savings at greater risk to losses, due to a falling market.

4. Soaring health costs. From 1999 to 2015, overall inflation ranged from 0.1-4.1%. But healthcare inflation has been rapidly increasing. According to HealthView Services, a healthcare research firm, health costs may rise faster than other goods and services. HealthView projects that for someone who retired in May 2016, healthcare costs could increase by 5.1% over the next 20 years.

Unfortunately, Medicare doesn’t cover all medical expenses. As we age, out-of-pocket expenses can be quite costly. In future dollars, a healthy 65-year old couple retiring in 2016 may pay as much as $567,903 in total retirement healthcare expenses, including costs like deductibles, co-pays and vision-related care expenses. The importance of being ready for this is critical – just 12% of working Americans have taken steps to prepare for future healthcare needs, according to a study by the Empower Institute and BrightWork Partners.

What about Your Financial Future?

These are just a few challenges facing retiring Americans. Of course, challenges will vary from individual to individual. No matter what your age or situation is, now is always a suitable time to get ready.

If you would like personalized guidance on creating a financial plan that offers income security and keeps your life savings protected from market declines, SafeMoney.com can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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