Better to Know What You’re Up Against

More and more today, we realize a secure path through retirement is riddled with challenges and uncertainty. I believe the best way to beat that uncertainty back is to be cognizant of the challenges ahead and plan accordingly. This is why for me the importance of having a plan in place for retirement can’t be overstated, and that plan must be rooted in reality if it’s going to be of any use.

With that in mind, here’s an excellent piece summarizing a thoughtful discussion between Jim Puplava and John Loeffler (two respected industry experts) about the changing realities for retirees, and the four big considerations they need to take into account under today’s challenging conditions.

The simple takeaway: when you plan for retirement, it would be smart to factor in today’s “four horsemen” of longer life spans, higher medical costs, lower interest rates and an anemic economy.


From Financial Sense

The Four Horsemen

There are four key issues that are having an impact on baby boomer retirement in ways that are catching many retirees off guard.

These issues are longer lifespans, growing medical expenses, financial repression and the low-interest rate environment, and the proliferation of stagnating economic conditions.


Many retirees are facing the fact that they will likely be living longer, due to medical advances and increased lifespans, Puplava noted.

“Social Security was put into effect in 1933 and implemented in 1935,” he said. “The life expectancy of a male was 65 years. Longevity has increased lifespans by over 20 years.”

Obviously, this will lead to a greater drawdown of assets over a longer period of time. Retirees who are 65 years old need to think about living off their assets and making them last for both them and their spouses for around 25 years.

One of the greatest risks is for one spouse to be institutionalized, followed by the other, leading to a two-household expenditure profile.

“I can’t tell you how much of a drain that would put on anyone’s budget,” Puplava said.

Medical Costs

A number of studies indicate out-of-pocket medical expenses in retirement will be between $230,000 and $250,000, Puplava said.

“There’s this myth that has developed,” he said. “Somehow people believe between Social Security and Medicare that these medical expenses are all going to be covered.”

However, Medicare is only going to cover about 60 percent of medical expenses, which is why retirees need a medi-gap insurance policy, and even then, they’ll still face out-of-pocket expenses, Puplava stated.

Financial Repression

Interest rates are at their lowest in history, Loeffler noted.

The return on safe assets has never been lower than it is now. No longer can retirees count on a reasonably safe return on their money, and many have been forced to take on risk, he added.

However, the problem isn’t only that safe investments have low returns, Puplava added.

We’ve been in a low-interest rate environment for close to 8 years now, and we are more likely to see this continue for the balance of this decade, he said. In fact, he sees a disinflationary environment currently, meaning that we’re unlikely to see the return of higher interest rates anytime soon.


General market conditions are also hurting retirees. Unlike during the 1990s when stock markets went up double digits each year and retirees could count on 7 or 8 percent returns on safe bond investments, today’s rates won’t support most retirees’ needs.

“We’re in a much different macro environment today,” Puplava said. “Unfortunately, the return on assets, whether it’s stocks or bonds, or even safe investments like Treasury bills and CDs, they’re just not there.”

The stock market has gone nowhere in the last 18 months, Puplava noted, reflecting the sad state of the US economy, which grew only 0.5 percent in the first quarter and a little over 1 percent in the fourth quarter of last year.

Puplava doesn’t think we’re going to hit 2 percent economic growth this year, which means we’ll see slower economic growth and interest rates remaining low.

Case Study

A recent case study involving one of his clients highlighted the problems retirees will face in the future.

This client had a wife that passed away in May 2015. The husband is 87, and the couple previously had a retirement plan in place. Upon retirement, their portfolio consisted of roughly 50 percent individual bonds and individual stocks. Everything was designed to produce income because they didn’t have as many assets as they thought they were going to have, Puplava said.

The couple decided to move from a one-bedroom apartment within an assisted living facility into a larger apartment in the same facility. The only problem was the rent was going to go from $3,000 a month to $6,500 a month.

“When they made that decision, it was 2013, the stock market was doing well, in fact the stock market was up 30 percent that year, and I said, ‘as long as markets hold up, we could probably wing this, but it was going to mean taking a distribution rate of almost 15 percent a year.’” Puplava said. “The problem is, 6 or 8 years down the road, at this kind of rate, if the markets don’t maintain this kind of rate of return, we’re going to run into problems.”

Puplava insisted on implementing the backup plan, which would have the retiree move back into the original one-bedroom apartment.

“(The retiree’s) pension was $3,700 a month, and he’s spending $8,000 a month,” Puplava said. “I was having to provide $4,000 out of his portfolio, and we were drawing that portfolio down.”

Luckily, with the move and a few other adjustments, the retiree will now be OK, but both Puplava and Loeffler feel this kind of problem will be more common for retirees as the four horsemen of retirement continue to plague them.