The financial industry has plenty of data and suggestions – it is their stock and trade. However, many of the assumptions we have grown comfortable with, 4% withdrawal rate, 85% income replacement rate, etc, are based on historical norms and may not reflect today’s reality. Employers, particularly those who feel obligated to provide retirement education and counseling to their employees, would be wise to take note of two recent trends:
- The Rise of Healthcare Costs: This may be “news” to very few of us; however, we may be only now just starting to see the impact of rising costs on our post-retirement quality of life. Consider this: at the end of last year two of the largest providers of long term health insurance raised their rates by double digits. Whether this is a one-time market adjusting bump, or the initial adjustment of a long term upward pricing strategy reflecting their true costs, remains to be seen. However, we should not be surprised that as the population lives longer, and with greater expectations for remaining active and worry free, the cost for this “service” outpaces overall inflation.
- Growing Housing Debt Carried Into Retirement: The amount of home debt employees are carrying into retirement is growing at an alarming rate. In 1989 21% of individuals ages 65-74 still had a mortgage; in 2010 that number was up to 37%, a 76% increase. The median debt they carried increased from $17,000 to $79,000 in 2010, an increase of 365%.Industry leaders are starting to take note. In a recent report the National Center for Policy Analysis analyzed this through the lens of relocation availability as a means to lower living expenses. They found that by far the single largest positive, incremental change to retiree monthly income would simply be downsizing the primary residence or relocating to a lower cost of living state.
While home mortgages and retirement healthcare premiums may feel like strange bedfellows for the HR department, these expenses will take more prominence in an employee’s retirement risk-reward calculation. For now make sure your financial education acknowledges these rising expenses and potential impact. It may be the difference for whether they retire now, or in two years’ time once the mortgage is finally paid off.