How the Average Retired Couple Could Deplete a $750,000 IRA in Only 17 Years

July 25, 2018

Bob and Julie, both age 65, just retired.  They’re both healthy, unafraid of market risk, and have a $750,000 IRA averaging 6% annual growth that their broker has told them “should last them the rest of their lives.”  The following are the average realities facing any such couple in August of 2018:

  • When a couple reaches the age of 65 together, one of them has a 50% chance of living to 92, and a 25% chance of living to 97 (1).
  • In 2018, life expectancies (2) for men and women, both age 65, are 84.3, and 86.7 respectively.
  • After a major long-term care event (stroke), the average total length of care is 4½ years. (3)
  • According to Fidelity Investments, a married couple retiring this year will spend an average of $280,000 on uninsured medical expenses in retirement (not covered by Medicare).
  • According to USA Today, the average retired couple (4) has $262,669 in investable retirement assets at age 65. Just for the sake of demonstration, we’ve given Bob and Julie $750,000 of qualified funds, nearly three times the national average.
  • Among the four most historically accurate market prognosticators alive today, the most conservative, Scott Minerd, is calling for a market crash of -40 to -45% (5), beginning approximately January of 2020. (The most accurate of the four, John P. Hussman, Ph.D., is calling for a -65% (6) )

The New Average Retirement of 2018

So let’s apply all of the above to Bob and Julie’s brand new retirement.  As predicted by Scott Minerd, in the second and third years of Bob and Julie’s retirement, the stock market declines more than -40% and Bob’s IRA suffers a devastating loss—even as they continue to draw down $3500/month from that account. On its way down, their broker of 25 years reminds them that they are “long-term investors, in for the long haul”, that their losses are “only on paper”, and strongly advises them against selling. As they did in 2000-2002 and again in 2007-2009, they comply, hopeful that the account can recover that loss over their remain-ing years in retirement. However, unlike those earlier declines when Bob was still max-funding his 401(k) from earnings, he is now no longer employed, no longer contributing, and is taking monthly withdrawals.

Nearly three full years into retirement, Bob’s IRA begins a long, slow recovery, resuming its average return of 6% annually.  Sadly, at the end of his 11th year of retirement, Bob suffers a major stroke from which he does not recover.  Now nearly 77, he incurs 4½ years of long-term care expenses, consuming the national average of $280,000 in uninsured medical expenses, depleting their retirement accounts even further. (Note: We are not accounting for taxes on these withdrawals.)

After 4½ years of care, Bob passes away just shy of life expectancy at age 82, just months before Julie runs out of money in mid-April of that same year.  In just 17 years, they have depleted their entire $750,000 account, and Julie loses her Social Security benefit, choosing to continue with Bob’s larger benefit instead.

Still, it’s not enough and after first investigating a reverse mortgage, she decides to sell their $375,000 home for the additional retirement capital, and moves in with her oldest local daughter, a 58 year-old RN.

Per our very first foot-noted statistic below, Julie lives ten more years, dying peacefully in her sleep at 92—amazingly without incurring any long-term care expenses of her own. Her daughter and siblings split the unspent $1,857 left over from the house sale proceeds.

And there you have it.  After two commonplace events, a market sell-off and a common stroke, Bob and Julie have gone through a $750,000 IRA as well as their $375,000 home, and their entire $1,125,000 marital net worth is gone.  Please remember that Bob and Julie started with nearly 3 times the national average in retirement savings, that each of these events, their duration and their timing, is based on the other national averages cited earlier, that all estimates are conservative in nature, and that we’ve given Bob and Julie every conceivable assumed advantage (7). It is worth noting that one additional impact of Julie moving in with her daughter for 9 years is that her daughter likely took time off from work to provide the care her Mom needed, effectively retiring early as many do, thus impacting her own Social Security benefits at full retirement age.

Solvable and Insurable

Unfortunately, the above scenario is played out by couples all over the country every day.  Sadly, these events are entirely avoidable and insurable, if one is working with a fiduciary who specializes in designed solutions like guaranteed lifetime income, long-term care planning, risk mitigation, and retirement income planning.  Not only would Bob and Julie not have suffered that initial -40% loss in a market sell-off, but their income would have continued for life, even after their accounts had been depleted, thus ensuring that their home would have passed to their heirs intact.  Lastly, they could have had up to $400,000 of long-term care funding available to them, income tax-free, enough to cover Bob’s national average of $280,000 in care expenses, and even have some care dollars left over for Julie.

Remember: You can solve these issues, you can live the retirement you’ve dreamed about, and you can provide for your own care—and still leave a monetary legacy to your children and grandchildren.

Give our office a call today, (603) 595-4990, and let’s begin to solve these issues—before either the markets or a medical event take your options off the table.

Footnotes:

(1) The Society of Actuaries, www.soa.org

(2) From ssa.gov: “A man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.7.”

(3) From the National Center for Assisted Living and the National Care Council, “…In summary, it is not uncommon for someone to receive care at home for several months or longer, followed by a 2½-year stay in an assisted living facility, with almost 60% then requiring a nursing home stay of somewhere between nine months and a little over two years. All combined, this is a total of approximately 4-5 years of long-term care. In this scenario, the total cost of care could easily exceed $300,000, depending on the cost of care in your region…”

(4) Economic Policy Institute, survey of consumer finance data

(5) CNBC: “Guggenheim investment chief sees a recession and a 40% plunge in stocks ahead”

(6) Mind The Trap Door, July 2018 commentary: “…In my view, investors should seriously consider the prospect of a market decline on the order of -65% from the recent market highs, and their capacity to tolerate that sort of loss without abandoning their investment discipline…”

(7) These include not accounting for taxes on the withdrawals needed to pay for long-term care expenses after Bob’s stroke, assuming a second-year selloff of only -40% rather than the -65% forecasted by Dr. Hussman and others, and assuming that Julie only lived to 92 and incurred no long-term care expenses of her own. In addition, we are also assuming that Bob and Julie incurred no other losses in the market during their 17 years therein, other than that initial loss in years two and three.

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