The New Retirement: Will You Be Ready?

The New Retirement: Will You Be Ready?

 

 

 

Hosted by:

Andy Sieg

President of Merrill Lynch Wealth Management 

 

 

With:

Ken Dychtwald

Co-founder and CEO, Age Wave

 

 

Lorna Sabbia

Head of Retirement & Personal Wealth Solutions

Bank of America

 

 

Surya Kolluri

Head of Retirement Thought Leadership

Bank of America

 

 

And:

Chris Hyzy

Chief Investment Officer

Merrill and Bank of America Private Bank

 

 

 

 

 

 

 

 

 

 

 

 

[PROGRAM OPEN WITH TEXT OVER MONTAGE OF VIDEO CLIPS]

Changing priorities

Longer lifespans

New opportunities

Retiring early …

 

Or working longer

 

The New Retirement: Will You Be Ready?

 

Please see important information at the end of this program.  Recorded on 02/26/2021.

 

 

LOWER 3^RD

Andy Sieg

President of Merrill Lynch Wealth Management

 

Andy Sieg:

Hello everyone. I'm Andy Sieg and welcome to this special program. We call it The New Retirement: Will You be Ready?

 

The pandemic hasn't just changed our daily lives; it's reshaping expectations for what the future may hold. Those nearing or already in retirement are revisiting long-held assumptions about when they'll retire, where they want to live, and how prepared they are for future healthcare costs and other needs. And they're dealing with new uncertainties about what all of it may mean for the economy and their retirement assets.

 

At the same time, retirement holds more opportunities today than at any time in history. The pandemic has accelerated some positive trends, like personalized medicine and remote work that hold immense promise for retirees and those nearing retirement who have no intention to slow down. Our goal is to help you understand these emerging trends and then to navigate them, so that you can live the life you want in retirement. 

 

Shortly, you'll hear from top experts from Bank of America and Merrill with practical steps you can consider now to prepare for the years ahead.

 

First, to help us sort through the complexities of today's new retirement realities,

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Ken Dychtwald

Co-founder and CEO, Age Wave

I'm pleased to introduce Ken Dychtwald, co-founder and CEO of Age Wave, a prominent think tank focused on all matters related to retirement and aging. Ken is one of the nation's leading experts on the topic and a great friend.

 

Ken, thanks so much for joining us.

Ken Dychtwald:

Good to be with you, Andy. Thanks for having me.

Andy Sieg:

So, Ken, last March, both you and your wife Maddy, who co-founded Age Wave with you, turned 70 years old. And you did that all while sheltering in place. Did reaching that milestone under those circumstances change the way you think about retirement and your view of the future?

 

Ken Dychtwald:

I'm going to have to say that it did.  I was always the youngest guy in the room, you know, I got started in my career and wrote my first books as a young man; and then all of a sudden, there I was turning 70.  And in the midst of COVID, it really gave us a lot of time to stop and think.  And a few of the things that we thought about was, did we want to stop working?  And we decided we didn't, we liked our work. We didn't want to work as much. We were going to scale that back a bit.

 

We also took a lot of time to think about our health. If we're going to be living another 10, 20, maybe 30 years, do we want to do it in a state of compromised health or as vital and healthy as we could possibly be?

 

And third, I would say we probably spent a lot more time this year talking to our Merrill Lynch advisors than we ever had before. Because with everything going on crazy in the world, we felt we wanted to not only think about where we stood financially now, but we wanted to be … have kind of peace of mind that we'd be fine in the decades ahead.

Andy Sieg:

You just published a book called, What Retirees Want. So, if you could tell us, what's the research showing about how the pandemic is changing people's attitudes and expectations about retirement?

Ken Dychtwald:

The book was sort of in the oven for about 10 years.  It was my 17th book and I hadn't done one for a decade.  And partly what struck me was that when my kids were in high school, there was a lot of attention focused on helping them consider the next four years of their life. You'd get materials about colleges, about the military. Did you want to go to a small school, a big school? How could we pay for it? And yet it occurred to me that when people look at their retirement, which could be 20 or 30 years, there's no book, there's no orientation. There is no essentially, kind of guidance for how do you make the choices that are in front of you?

 

And I think a couple of things surfaced during COVID. First of all, I think it really occurred to people, for the first time that life expectancy has been elevating.  Now it did backtrack a little bit this last year.

 

GRAPHIC:

Changing Views of Retirement 

·         Life expectancy is increasing

·         Funding those “extra” years will take planning 

But for most people, living 20 or 25 years after normal retirement age is commonplace.  In fact, 80% of the American public hadn't really ever thought about, “How much is that going to cost me? Can I afford that? Do I have the resources necessary?” (Source: Merrill Lynch/Age Wave, “Finances in Retirement: New Challenges, New Solutions,” 2017.)

 

GRAPHIC:

Changing Views of Retirement 

·         Life expectancy is increasing

·         Funding those “extra” years will take planning 

·         There is much to be grateful for

Another thing was that I think a lot of older people felt a lot of gratitude for their lives and their resiliency shined.  This has been a really tough time to be a 20-year old or a 30-year old, you know, having no safety nets and having to raise kids and home-school them while you're doing your job from home. A lot of older people had a much lower level of psychological distress than their children and grandchildren, who were really waving a lot of red flags.

 

And last, I'd say that it's been a time where people have really missed the human connection.  And so, many people are now thinking in their retirement, they don't want to just sit around and watch TV, which is what a lot of people were doing before COVID and during COVID.

 

GRAPHIC:

Changing Views of Retirement 

·         Life expectancy is increasing

·         Funding those “extra” years will take planning 

·         There is much to be grateful for

·         Human connections and purpose are essential

People are dreaming up the trip they want to take, or how to spend more time with their kids or their good friends.  Or how to do something meaningful, how to use one's life with… to have more purpose in its drive.  And I think that those are big changes and I think that they're probably good wake-up calls for people as they contemplate this next stage of life.

Andy Sieg:

Ken that all really truly resonates. One of the biggest decisions people have is where to live in retirement. And, you know, I'm wondering through your work, do you see more people now leaning toward staying in their homes rather than moving to assisted living or retirement communities?

 

And then, when you think about this remote work revolution, do you see that creating opportunities for those who choose to continue working longer?

Ken Dychtwald:

So more and more people are saying with greater force, "I want to be in my home, throughout the rest of my life."  And by the way, some people are even thinking they might even want to change homes.  Maybe they want to downsize. Maybe they've got too much home or maybe they’d like to relocate to be near a college town or be with better weather or be closer to friends and family. 

 

For some people living in a retirement, an active living retirement community, might be just right for them.  But more and more people are now saying, coming out of COVID that they'd like to remain active, they like to remain connected to their communities.  But maybe even find a way to live where it won't cost as much and they can be closer to people they love.

 

Your point about working from home.  Before COVID, when older people were not very competent with technology, we kind of make jokes about it. But it's now become kind of a life and death issue with telemedicine being so front and center. The good news is, is that many more people in their fifties and sixties and seventies and older are now getting quite competent in knowing how to work on their technology.  And that means that if people want to either volunteer, or take a new job, or be involved with the family or even people around the world, you can do that from home. And so working from home is become more a way for people to be more flexible in their desire to continue working.

 

However, I do want to say that older people really like the company of workmates.

LOWER 3^RD:

Pre-retirees think a reliable income is what they’ll miss most;

while non-working retirees miss the social connections most.

Source: Merrill Lynch/Age Wave, “Finances in Retirement: New Challenges, New Solutions,” 2017

We did a study with Merrill Lynch and we asked pre-retirees, “What do you think you're going to miss the most when you retire?” And they said, “The money, the paycheck.” But then when we asked retirees, "What do you actually miss the most now that you're no longer working?” And hands down, they said they missed the action, the social connections, the stimulation.  And so I would say that everybody doing everything from home is not going to satisfy that quite as much as people coming back together again, even if it's for only a few days out of each week.

Andy Sieg:

Let me shift gears a little bit. Your research has also shown that many Americans underestimate the cost of living in retirement.  And my question is really how can we be better prepared financially for this phase of our life? And how has the pandemic changed those calculations, particularly when we think about healthcare costs?

Ken Dychtwald:

One of the things I've seen in the 45 years that I've been on this beat is that we make a few mistakes when we contemplate planning for our retirement.  Mistake number one, we assume it's a solo project.

LOWER 3^RD:

Tip #1: Include the whole family in planning for your

financial goals and expenses in retirement.

Most retirement is a family project.  You might have a grandchild that needs help with tuition. You might have a spouse that's not feeling well.  You might have kids that move back home with you.  And so, there are all sorts of family dynamics that have to be discussed and thought about.

 

Where else do people make a mistake? They don't factor in healthcare costs.

LOWER 3^RD:

Tip #2: Be sure to factor in healthcare costs, including

an unexpected illness or long-term care.

A lot of people don't want to think about the possibility of an illness or long-term care. So they just say, “Hey, I don't want to deal with that, it's too unpleasant a subject. I'd rather watch the football game.” The average out of pocket costs in retirement for a couple is $440,000.  (Sources: Employee Benefit Research Institute, 2019; Urban Institute, 2016.) And most people haven't thought about that at all.

 

And the third point I want to make and it's an important point is that retirement and aging are not the same for women and men. 

LOWER 3^RD:

Tip #3: For women, take into account higher life expectancy

and potential caregiving needs for a spouse.

Women have about a five-year higher life expectancy than men. (Source: National Center for Health Statistics, 2021.) And by the last census in America, the average woman who was partnered with a man was partnered with a man who was two and a half years older than her.  (Source: Census Bureau, 2010.)   So, what does that mean?  It means that for most couples in their retirement years, if the husband is not feeling well or needs some care, the wife will usually step in and look after him. But then when the husband passes away, who's going to care for her?  And have they both thought about will that woman have sufficient resources to go the distance with peace of mind?

 

And so we need to have discussions within our families and with our financial advisors to make sure that both the male and the female side of the equation is well-handled.

Andy Sieg:

Ken, thank you. Let me open it up wide, I guess, here. Anything else that we may not be thinking about when it comes to aging?

Ken Dychtwald:

Yeah, there's another one that I think is sort of a big deal that seldom gets talked about. I think we think it's enough to just let retirees have some freedom, which is great to not have to worry about pleasing your boss or pleasing your parents or raising your kids. That freedom is liberating. But on the other hand, I think there's so much more we could be in our elder years.  We could be leaders in our communities. We could be guides to our younger family members.  We can help people across town who maybe could benefit from some of the skills and the emotional intelligence we've acquired.

 

So, I think that the whole idea of finding new purpose in retirement is more than just a nice thing to do.  I think it's almost an obligation of those of us who are going to be living long lives, to think about how we could rise to our highest levels in our later years versus just simply winding off the playing field.

Andy Sieg:

It's such a powerful point. Despite all that's happened, I think we both share a trait. We are optimists.  Is technology a reason that you believe now is such a great time to be a retiree?

Ken Dychtwald:

I think technology is a wonderful tool and the tools keep ramping up. I want to make sure that older people don't get left behind in the digital divide, because a lot of these technologies are geared to turn young people on and they're easy to use. 

 

I would have to tell you that what I've learned from my years of studying longevity and maturity that even more important than technology are our relationships. It's the people we care about, it's the people who care about us. There are some people that have gone through COVID alone or without anyone as their sort of protector. Or without any trusted people to call for guidance.  I think having a network, having your own kind of tribe of people you connect to, is even more important than the technology you use.

Andy Sieg:

You use a phrase that I absolutely love; that you'd rather be “useful rather than youthful.” Can you tell us more about what you mean?

Ken Dychtwald:

Yeah, it's… there's a huge amount of media attention around more and more of us growing older—especially my generation, I'm a baby boomer—about everybody wants to be youthful. You know, what do you do so you don't have wrinkles and what can you do so you can be hip and cool and I think youthfulness is considered a great premium. 

 

But I would argue that usefulness, where you have a role to play, where you're needed, where you’re resilient.  And by the way, during COVID all the studies have shown that of all the generations of Americans, it's the older adults that have displayed the greatest amount of resilience. And that's because we've been through difficult times. You know, I was with my dad the night he died, I was with my mom the night she died.  I've had failures in business, I've had grand successes. I've watched my kids grow up and leave the nest. And so I think that that resilience is an amazing asset. And I guess I'd like to feel that in this stage of life being useful, in addition to feeling youthful, are things we all ought to strive for. 

 

And maybe we ought to put a little more attention in our public narrative and discussion about how to help people when they're planning for their retirement. “Have you thought about how you might be more useful? Can we aim you towards a volunteer program? Or maybe you'd like to create some kind of a fund or a trust, so that you can see the things you care about blossom and flower?” And so I think this usefulness theme is an important one and I appreciate your asking me about that.

Andy Sieg:

Hey Ken, it's a, it's a great note to end on. Thank you again for joining us. You have given us much to think about.

Ken Dychtwald:

Good to see you, my friend. Be well.

Andy Sieg:

In a moment, Lorna Sabbia, who heads Retirement and Personal Wealth Solutions at Bank of America will be speaking with two of our top experts on investing and retirement for thoughts on what you could do now to prepare for these new retirement realities.

 

But before they get started, please remember, we're here to help. If you're working with a financial advisor, please reach out to her or him following this program with any questions. If you don't currently have an advisor we invite you to reach out and start a conversation.

 

And now it's my pleasure to introduce Lorna. Please take it away!

Lorna Sabbia:

Thanks Andy, and thank you, Ken. That was a great discussion.

LOWER 3^RD

Lorna Sabbia

Head of Retirement & Personal Wealth Solutions

Bank of America

There's so much to look forward to and also a lot to think about and prepare for, which is exactly what we'll be focusing on now. So joining me today to share some practical ideas and to help you get ready for all of these new retirement realities are Chris Hyzy, our Chief Investment Officer for Merrill and Bank of America Private Bank.

 

Chris Hyzy:

Hello Lorna.

Lorna Sabbia:

Hey Chris. And also joining us is Surya Kolluri, who heads our retirement thought leadership at Bank of America.

Surya Kolluri:

Hi Lorna.

Lorna Sabbia:

Hey Surya.  So Surya, let’s start with you. You've been keeping tabs on all of the latest research on how the pandemic has changed retirement expectations. How would you advise somebody who's wondering whether they need to rethink their retirement plans and would the advice be different for a younger person who has more time to save and prepare?

 

LOWER 3^RD

Surya Kolluri 

Head of Retirement Thought Leadership

Bank of America

Surya Kolluri:

On the research side, we've been looking at the data over the past year and it wouldn’t be surprising if I report that people's financial wellness, feelings of financial wellness has been going down. And when we look deeper into the data, a couple of surprises popped up.

 

LOWER 3^RD

Only 14% of Generation X feel confident about saving for 

current and future healthcare costs.

Source: Bank of America 2020 Workplace Benefits Report

One was what the Gen X reported. So Gen X is the generation born in 1965 through 1980, that window.  They reported not feeling confident about savings for their health care in their retirement years. Only 14% express confidence on that count. 

 

And then in the Millennial generation, those born after 1980 through, let's say 1996, that window, not surprisingly, their issue is debt, in particular student debt. 

LOWER 3^RD

Less than 30% of Millennials feel confident they can 

pay back their student loan debt.

Source: AgingWell Hub, Georgetown University’s McDonough School of Business, Nov. 17, 2020

And only 30% express confidence that they will be able to pay that off in preparation for retirement.

 

Now, the second part of your question in terms of rethinking retirement and revisiting it, I would suggest one, first setting the narrative of one's retirement, which is taking into account life priorities.

 

GRAPHIC:

Rethinking Your Retirement

·         Home

·         Health

·         Charitable contributions

·         Life expectancy

·         Future healthcare costs

·         Long-term care

Such as home, such as health, such as charitable contributions. So, set that narrative and then address some fundamental factors. Those include life expectancy, healthcare cost projections and also the need for long-term care. All those put together could be the beginning of a conversation in setting up, setting up one's retirement roadmap.

Lorna Sabbia:

That’s great. And how about someone that’s facing an earlier than expected retirement? What could they consider doing?

 

Surya Kolluri:

Firstly, I would suggest doing a portfolio stress test to …

LOWER 3^RD

#1 – Consider doing a “stress test” on your portfolio 

        to identify any imbalances in your cash flow.

Particularly from a cash flow perspective, what's coming in, what's going out, what's in balance. I'm sure Chris would agree with this point.

LOWER 3^RD

#2 – Think about the potential impact of rising  

         healthcare costs and future long-term care.

Secondly, I would also think about healthcare costs, which is how are healthcare costs going to inflate; at what point does long-term care kick in?  That will be a second thought I would have.

LOWER 3^RD

#3 –Seek out advice on when to file for

       Social Security benefits.

And third, thinking about Social Security, getting some advice on when to file for Social Security income and thinking about that.  That fits one's personal and one's family's circumstance.

 

And also thinking about life expectancy. So, one of the things that I would suggest is not just go with averages. Let me give you an example:

 

GRAPHIC:

Consider Your Potential Life Expectancy

·         For a couple, both age 65:

o   50% chance one of them will live to 92

o   25% chance one of them will live to 97

 

Source: Bank of America / Merrill Lynch Chief Investment Office, “Tackling Retirement Risks,” Spring 2020

Let's take a 65-year old, healthy couple.  The chances that one of the two spouses would live to age 92 is 50%. The chances that one of the two spouses might live to age 97 is 25%. So, thinking about longevity in this new way is going to be important. So, Lorna, those would be some of the steps I would recommend.

Lorna Sabbia:

That's really helpful, Surya, thank you so much. Chris, let's go to you from an investment perspective. One of the key questions retirees have is where to look for income, of course, and with interest rates at such low levels at this point, it's a real challenge, obviously.

What do you recommend people nearing and in retirement consider doing now?

Chris Hyzy:

Well, Lorna, it's yet again, another challenge, right? We have to deal with low interest rates.

LOWER 3^RD

Chris Hyzy  

Chief Investment Officer

Merrill and Bank of America Private Bank

We have to do with what is perceived or real high market volatility. And Surya talked about this already—financial roadmap, the statistics around financial wellness.  And even though interest rates have backed up recently, they're still at secularly low levels and expected to be below what we've seen during other life cycles.

 

So, if that's the case, which we do believe, then how do you deal with those low interest rates? Well, there's a couple of questions you have to ask yourself within your financial roadmap. First and foremost, can you accept more risk?

 

GRAPHIC:

Dealing with Low Interest Rates

·         Consider less exposure to fixed income (or bonds)

·         And more exposure to areas like:

o   Preferred securities

o   Equities (or stocks)

And if you can accept more risk because your life expectancy is longer and your investment life cycle is longer, than you should consider having less of an exposure to fixed income and actually moving down in the cap spectrum. Said it simply, move down to preferreds from credit or bonds in general; or move over into equities.

 

Now, what we expect in the next 10 to 20 years is, there's a pool that we all know very well. It's called the Gen Z pool and the Gen Y pool. And those two collectively are somewhere around 160 million people. So we think there's two big trends going on. Even though interest rates are low, you have a pool of people building an equity culture again. So there's likely to be a significant rotation, lower in fixed income, higher in equities over the coming couple of decades, at least in the next decade, in our view.

 

GRAPHIC:

Dealing with Low Interest Rates

·         Consider less exposure to fixed income (or bonds)

·         And more exposure to areas like:

o   Preferred securities

o   Equities (or stocks)

o   Including dividend paying and dividend growth

Now with that, the retiree should consider, where the risk is appropriate, to actually increase risk more towards total return to pick up some dividend paying areas, dividend growth areas in equity that you traditionally would have received in the bond market, but simply have a harder challenge to do that now because of where rates are. So, it's a subtle shift up in risk, closer to dividend growing areas within the equity market, to make up for the potential for lost income in the bond market.

Lorna Sabbia:

That's really helpful. Let's keep going, because I think market volatility and inflation are two other big concerns. So, Chris, how can retirees and those approaching retirement manage those two risks as well?

Chris Hyzy:

When we look at market volatility, there's the long-term market volatility that tends to be muted.  But take a snapshot on a day basis, week basis, month, quarter, it can be quite volatile.

 

GRAPHIC:

Managing Market Volatility

·         Increase your diversification across asset classes:

o   Equities

o   Fixed income

o   Real estate and other areas

·         Have a disciplined plan for:

o   Asset allocation

o   Rebalancing

Number one, increase diversification. That's diversification across asset classes: equities, fixed income, real estate, other solutions that help mitigate volatility overall.

 

Have a defined plan. And that plan is about your target asset allocation, but it's also about your rebalancing plan. When markets get very volatile, it's important to have a disciplined plan on how to rebalance and when to do it when the markets give you that opportunity.  To rebalance areas up that have underperformed and take profits in areas on a rebalancing basis that have outperformed.

 

The other way to consider this is not just to look at your traditional equity versus fixed income standard asset allocation. You have to look within those areas: “How do I want to be exposed and positioned within equities?  Do I want to have more allocated to dividend growth areas because of the lower interest rates in the bond market? Do I want to take a little bit more risk in bonds in terms of credit, versus Treasury yields; how do I want to deal with that?”

 

And last but not least, as it relates to inflation, with the significant amount of fiscal stimulus out there, the potential for higher inflation is coming. Question is, how do you mitigate some of that higher inflation?

 

LOWER 3^RD:

Consider some exposure to areas that could 

benefit from a gradual rise in inflation.

And that's having more exposure to inflation beneficiaries; areas like real estate perhaps; areas within the equity market that'll benefit from a steeper yield curve. Areas that also could potentially benefit from a solid core balance sheet in issuing higher dividends in the future. 

 

So those are areas that we would consider to help mitigate against volatility and potential for a rise in inflation.

Lorna Sabbia:

That's great. That's a lot of action packed ideas. So thank you for that. Chris.

 

I want to take a moment and switch gears for just a second and focus on gender. We know that women have been disproportionately affected by the pandemic. Many have lost their jobs, or they themselves have taken a career break to manage things like homeschooling and caregiving. And that's certainly cutting into their retirement readiness in a big way.

 

And when you take a step back and you look beyond the pandemic, we know that women live longer than their male counterparts. Oftentimes they are retiring on average five years earlier. We know that there's still a pay gap. And as we talked about, even before the pandemic, the topic of caregiving is a female topic. So, I want to talk about some of the steps women should consider taking now to pursue greater security in retirement.

So, Surya, let me start with you

Surya Kolluri:

Lorna, thank you.  I was reflecting on the pay gap point you were making. And in our Women and Wellness study, when we traced the financial life journey between males and females,

 

LOWER 3^RD:

A woman at retirement age may have earned

a cumulative $1,055,000 less than a man,

due to the “pay gap” and work interruptions.

Source: Merrill Lynch/Age Wave, “Women & Financial Wellness: Beyond the Bottom Line,” March 2018

… the “aha” that we discovered in that study is that the million dollar difference at the end of the financial life journey, when somebody gets to retirement, between females and males, disadvantaged to the female as they're going through their financial life journeys.

 

LOWER 3^RD:

Women’s #1 financial regret was not investing

more of their money earlier.

Source: Merrill Lynch/Age Wave, “Women & Financial Wellness: Beyond the Bottom Line,” March 2018

And both of us, when we looked at the research findings were surprised to see that female investors expressed their single biggest regret, which was not investing soon enough.

GRAPHIC #6:

Women & Financial Security

·         Start investing early

·         Consider your comfort with risk

and your retirement goals

·         If offered, maximize your contributions

to your employer’s retirement plan

So, step number one is getting comfortable investing earlier. Secondly, as Chris pointed out in his remarks earlier, thinking about the portfolio and making sure it reflects one's risk propensity and what one wants to accomplish in their retirement as well. Thirdly, if one is, for example, working and contributing to a retirement plan, like a 401(k) or a 403(b), you know some plan like that, making sure that, if possible, maximizing it so the matching contributions are taken advantage of and no money is left on the table.

 

And then finally, in your remarks you made the point about caregiving; maybe for an elder in the family, caregiving for maybe a spouse, long-term care expenses, et cetera. And I think of these, Lorna, as financial puzzle pieces that we should put on the table in conversation with advisors and say, "Hey, where does the push and pull between these pieces so that we can lay out a logical plan?" 

Lorna Sabbia:

Great, thanks, Surya. Chris, I want to get your perspective as well. What steps would you advise women should consider in pursuing their own security in retirement?

Chris Hyzy:

I'm going to emphasize that point that Surya just made, which is start early and that goes for all investors, especially for women because the challenges that women face are going up every single day.  That increases stress and that can create latency as it relates to starting investing for the future.

 

So, start now, have a plan. The power of compounding works in your favor the earlier you start with a longer-term time horizon, by having a well-thought-out plan that works hand in glove with your objectives.

Lorna Sabbia:

Surya, on another note, there tends to be a general concern about the viability of both Social Security and Medicare. Do you see any potential policy solutions on the horizons and what steps should clients be taking in the meantime?

Surya Kolluri:

Indeed Lorna, you know, no surprise. This question comes up again and again and again.  Let's just take a quick historical perspective.  And when we take a historical perspective we will conclude that changes have been made to the system.

 

So, for example, in the 1950s for Social Security, a cost-of-living adjustment was made. We call it, refer to it as COLA. And then in the fifties and the sixties, the retirement age for females first and males next was brought down to 62 with a commensurate reduction in benefits. And as recently as 2016, Lorna, as we know, there was a very popular option in Social Security called “file and suspend” and that was revised.

 

So, if you look historically, policy makers do make changes.  And from the best we can tell in the short term, given the focus on pandemic, given the focus on economic relief, it is unlikely in the very near term that changes are going to be made. So, what we should be doing is thinking about the, what the law provides, what the constraints are and try to come up with a good retirement plan that includes Medicare, that includes Social Security as we go forward.

Lorna Sabbia:

Excellent. You know, even with Medicare, out of pocket healthcare costs at age 65 average nearly $7,000 per year and some 70% of people over the age of 65 will require long-term care at some point.  (Sources: HealthView, projections as of 2020; U.S. Department of Health & Human Services, National Clearinghouse for Long-Term Care Information, October 2017.)

So, Surya, are there ways that people can prepare for those types of expenses?

Surya Kolluri:

Very much Lorna. Let's take Medicare.

 

GRAPHIC:

Understanding Medicare:

·         Part A (hospital insurance)

·         Part B (medical insurance)

(Aka “Original Medicare”)

·         Part C (private plans approved by Medicare)

·         Part D (prescription drug coverage)

·         Medigap (supplemental insurance)

Source: U.S. Department of Health & Human Service

There's Part A and Part B, hospital and medical coverage.  And those two together, part A and part B together, are called the “Original Medicare.” Then there's part C, then there's part D, which is prescription coverage. And then there's Medigap. So, there's a lot going on with Medicare, just awareness and education and clarification on what Medicare is and how it works. 

 

LOWER 3^RD

Medicare, on average, only covers 67% of healthcare costs

for people in retirement.  33% is funded out of pocket.

Source: Medpac, June 2019 Data Book: Health Care Spending and the Medicare Program

And so, for example, your point you made about the costs that a family might incur, Medicare only covers 67% of what is needed. So, there's 33% out of pocket that one needs to consider in their retirement planning.

 

So thinking about that and thinking about when to file for Social Security and what impact does that have in terms of income, in terms of taxes, in terms of flowing into paying for the supplemental insurance, all becomes very important. So one step is educating oneself. The second step is thinking about how these parts interact with each other.  And then third, thinking about how Social Security and Medicare go hand in hand.

Lorna Sabbia:

That's great. You know, we've talked about a lot, we've talked about a lot of risks and challenges. I have a final question for Chris, are you optimistic about the future of retirement?

Chris Hyzy:

Lorna, I'm more optimistic today than any time in the most recent past. And there's a lot of reasons for that.  And first and foremost, just take a look at the economy and the cycle we're in right now as we head towards full reopening. But most importantly, thinking out over the next decade, two decades.  This giant economy in the United States and around the world is ever increasingly becoming digital, that's number one.

 

Number two, innovation is taking over not just in technology, but across all sectors, as it relates to what is driving growth out there. And that has a lot of good implications, in our opinion, for investors.  We have a cohort out there, as we've mentioned before, collectively between Gen Z and Gen Y that are now just becoming investors for the first time and beginning to invest for the long haul.  We believe we are at the footsteps of a multi-decade long bull market. That's the big reason why I'm so optimistic.

 

Secondly, there's a bull market for overall advice, the convergence between life advice and financial advice.  And those two converge directly at the footsteps when people are beginning to think about retirement and through retirement. That's why I'm mostly optimistic.

Lorna Sabbia:

That's I think a perfect note to end on.  Chris and Surya, those were really some helpful and thoughtful insights that you shared. I know it's a conversation that we're going to continue to have for many years to come. I want to thank you both for joining me today.

 

And I also want to take a moment and thank all of you for joining us today. We hope both these conversations gave you some solid and actionable ideas that you can put to work right away as you plan for and live the life that you want in retirement.

 

Thanks again, everyone.

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