Many wealthy Americans feel confident about retirement, but the price of confidence can be high. A recent Prudential survey found that while 89% of mass affluent Americans believe they will be able to cover basic expenses in retirement, most are ignoring two major risks that could derail their plans: inflation and health care costs.
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That’s why even wealthy Americans can’t ignore these risks when planning for retirement.
Survey finds many mass affluent couples are not factoring inflation into their retirement strategies:
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Of those who discussed retirement with their partners, only 53% considered inflation.
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Among those who had not had the conversation, that number dropped to 45%.
“It’s a good idea for everyone to factor inflation into their overall financial planning, including retirement planning,” says Chris Leckenby, a financial planner at Prudential. “If we only look back five years, $100,000 in annual spending in 2020 would be equivalent to nearly $125,000 in spending in 2025.”
Failure to account for inflation may deplete assets faster than expected. Lekenby recommends running multiple scenarios with a financial planner to stress-test your plan.
“With a 20-year average inflation rate of 2.2% and a five-year average inflation rate of 2.7%, we can easily work with clients to understand the long-term impact of different interest rates on overall assets,” he said. “If we have high inflation for a year or two outside of normal averages, coupled with a period of market downturns when distributions are taken from retirement accounts, that will impact financial plans faster than a typical straight-line cash flow forecast.”
Lekenby said it was important to consider various scenarios and make the right asset allocation.
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Healthcare is another major blind spot:
“As people live longer, this is a vital project because health care costs increase with age,” Lekenby said.
He recommended paying an extra $600 a month to cover health care costs in retirement, but warned that long-term care can be much more expensive.
“An extra $600 a month is not bad — a lot of retirees don’t factor in $10,000 a month,” Lekenby said. “This is the typical cost of a nursing home room if long-term care is required. If this happens in retirement, assets can be depleted quickly unless we plan for it through a long-term care policy, hybrid life insurance and annuity options, or self-funding.”
