Investing October 28, 2020

Pre-Retirees and Retirees Can Take Steps to Address Inflation in Retirement

Few are discussing the impact of inflation with a financial professional or looking for a financial product that can increase their income to help address inflation.

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Fifty-seven percent of Americans are worried that inflation will make basic retirement expenses unaffordable, Allianz found in a survey that formed the basis of its “2020 Retirement Risk Readiness Study.” Furthermore, 48% of retirees and 62% of non-retirees have no idea how much they currently spend or will spend on health care in retirement.

Despite these concerns, only 24% of Americans are discussing the impact of inflation with a financial professional, and a mere 21% say they will look for a financial product that can increase their income to help address inflation.

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Kelly LaVigne, vice president of consumer insights at Allianz Life, tells PLANSPONSOR that inflation should be a concern for every retiree. “Even if it averages 3% over the course of retirement, within 24 years, a retiree’s cost of living is going to double. Everyone knows that inflation makes things more expensive over time, but few seem to appreciate that rising costs can also bring more complexity, which is particularly concerning as we age and our cognitive ability declines,” LaVigne says. “It is already challenging to establish and maintain reliable sources of retirement income. The additional pressure of managing increased expenses can pose a risk to financial security if people don’t have a strategy for increasing income built into their retirement plan.”

LaVigne says there are steps people can take to mitigate inflation risk. “The first is working with a financial adviser, who can have a better handle on their needs,” he says. Allianz learned in its survey that people are afraid to talk about their concerns, so it is critical that if someone goes to the trouble of hiring an adviser that they are straight with them, LaVigne says.

The next thing people should do is wait as long as they can to take their Social Security benefit, LaVigne says. “If you think about it, Social Security is one of the few guaranteed sources of income that is supposed to last your lifetime,” he says. “It also has a cost-of-living adjustment [COLA] built in.”

Social Security benefits can increase in value by 25% to 30% with a delayed start date, he notes.

The third thing people can do is to invest in products that keep up with inflation, such as an immediate annuity with a COLA rider, or guaranteed income that promises to keep up with inflation, LaVigne says.

Steve Vernon, president of Rest-of-Life Communications, says he wholeheartedly agrees that delaying taking one’s Social Security benefit is key. People can live off of what they have saved for retirement in the interim, Vernon says.

For those who are wary of purchasing an annuity, there are platforms that can bid an inquiry out to multiple insurers to find the most attractive contract and price, Vernon says. Two examples of this are immediateannuities.com and spia.direct, he says.

Benefits October 28, 2020

The Critical Role of HSAs in Helping People Prepare for Retirement

Experts say it is important to encourage health savings account holders to invest their money, as doing so increases their balances four-fold.

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During the 2020 PLANSPONSOR HSA Conference, Nancy Emerson, vice president, health solutions thought leadership, Fidelity, said the first step in helping people better prepare for health care expenses in retirement is to help them “understand the health care benefits they are enrolled in.”

Emerson also said financial and health considerations are intertwined. “We believe health care plays a big role in someone’s financial wellness.”

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To help improve financial wellness, Emerson said in the session, which was sponsored by Fidelity, Fidelity has been offering health savings accounts (HSAs) for the past 10 years. She said Fidelity believes that the first step in helping people improve their outlook when it comes to health care expenses is to teach them to “shop for health care services the way they do for other things. Confident consumers make better health care decisions, and this can help bring costs down, and controlling health care costs means a greater likelihood of people attaining financial security.”

Next, it is important to teach people about healthy behaviors and preventative care, she said.

If someone opens an HSA, they should be able to take care of health care expenses as they come in, Emerson said.

Three ways people can do a better job of preparing for health care costs in retirement are by opening an HSA, taking out long-term care insurance and educating themselves about medical costs in retirement.

To that last point, William Applegate, vice president, industry relations, Fidelity Health Solutions, said Fidelity estimates that a single person retiring today at age 65 will need $150,000 to cover health care costs in retirement, and a 65-year-old couple retiring today can expect to spend $295,000 on health care throughout their retirement.

Applegate said that while it is important to educate people about these costs, it is also important to prevent them from getting “sticker shock, because that leads to inertia and they don’t do anything to prepare. These are big, scary numbers—no question. The most important thing is to help drive smarter choices during open enrollment and to educate them about the important role that HSAs can play in helping them prepare.”

Applegate noted that people who own HSAs have generally taken the time to become more knowledgeable about health care costs in retirement, and those who save for both retirement and health care costs through an HSA are more confident about their personal finances, are more confident about achieving their financial goals and believe they will have enough savings by the time they want to retire, Applegate said.

It’s up to plan sponsors and advisers to educate workers that HSA balances can roll over from year to year, can be invested, have a triple tax advantage and can be withdrawn for nonqualified expenses after age 65, he said. As it stands, Applegate said, “38% of people think you use the money or lose the money at the end of the year, 54% don’t know the assets can be invested, 33% don’t know about the triple tax advantage and 46% don’t know about the leniency of the use of the money in retirement.”

Applegate noted that a third of people in the U.S. are carrying some form of medical debt, and 31% of hardship withdrawals from defined contribution (DC) plans are to cover health expenses.

Applegate said the best way to get people to open an HSA is to integrate education about the accounts with retirement savings and to make investing the assets in the HSA automatic. “People who invest their HSA savings have balances that are four times higher than those who do not invest, at every step of the way,” Applegate said.

Applegate also said that people who have both an HSA and a retirement account have a total of $216,000 in savings, versus $114,000 if they only have a retirement account. People with both are deferring an average of 10.6% of their salary, versus 6.7% for those with just a retirement account, he said.

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