Many wealthy Americans feel confident about retirement — but confidence can be expensive. A recent Prudential survey found that while 89% of mass affluent Americans believe they will be able to cover essential expenses in retirement, most ignore two major risks that could derail their plans: inflation and health care costs.
Find out: Retire a Millionaire: The Best $20,000 I Ever Spent Preparing for Retirement
Read Next: 5 Smart Ways Retirees Are Earning Up to $1K a Month from Home
Here’s why even wealthy Americans can’t ignore these risks when planning for retirement.
The survey found that many mass affluent couples are not factoring inflation into their retirement strategies:
-
Only 53% of those who discussed retirement with a partner considered inflation.
-
Among those who did not have the conversation, that number dropped to 45%.
“It’s good practice for everyone to factor inflation into their holistic financial planning, including for retirement,” said Chris Leckenby, financial planner at Prudential. “If we look back just five years, $100,000 in annual costs in 2020 would equate to nearly $125,000 in costs in 2025.”
Failure to account for inflation can deplete assets much faster than expected. Leckenby recommended running multiple scenarios with a financial planner to test your plan.
“With an average inflation of 20 years of 2.2% and five years of 2.7%, we can easily see with clients how different rates affect the overall assets in the long term,” he said. “If we have high inflation for a year or two outside of the normal average, combined with down market years while you’re taking distributions from retirement accounts, that will impact financial plans much faster than a typical linear cash flow projection.”
It is important to look at the various situations and have the correct asset allocation, said Leckenby.
Discover More: 64% of Americans are unprepared for retirement — and 48% don’t care
Health care is another major blind spot:
“With the population living longer, it’s a critical item as health care costs accumulate with age,” Leckenby said.
He recommended putting in an additional $600 a month to cover health care in retirement — but warned that long-term care could be much more expensive.
“An additional $600 per month isn’t so bad — it’s the $10,000 a month that many retirees don’t consider,” Leckenby said. “That’s your very typical cost of a nursing home room if long-term care is needed. If that event occurs in retirement, assets are depleted very quickly unless we plan for it through long-term care policies, hybrid life insurance and annuity options, or self-funding.”