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Social Security: Planning for expenses, income ahead of retirement

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Is Social Security’s cost of living adjustment (COLA) keeping up with retirees’ needs amid depletion fears? Scott Inman, GenWealth Financial Advisors Financial Advisor and Host of “Get Ready for the Future Show”, joins Yahoo Finance Live to discuss some of the biggest expenses for people planning to retire, including health care costs, and how workers should anticipate income needs ahead of retirement.

Video Transcript

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RACHELLE AKUFFO: Well, as inflation continues to show signs of cooling. This may impact your Social Security. New estimates show that next year’s Social Security cost of living adjustment will be over 2/3 less than the increase in 2023 according to the Senior Citizens League. So what does this mean for your retirement planning? Well, Scott Inman, GenWealth Financial Advisors Financial Advisor and host of Get Ready for the Future show joins us now. Thank you for joining us again this morning.

So as we get ready for the future, what do you see as the biggest threats at the moment to people’s retirement planning?

SCOTT INMAN: Well, when it comes to the Social Security component, I think the big thing is what’s going to happen to Social Security in the long run? And that’s a big question that we get in our client meeting rooms. Is it going to be there? And the reality is it is going to be there. What it looks like is really the big question. So the Social Security Trust Fund is predicted to be depleted in the next decade.

So what does that mean? Well, if that happens in the first part of the 2030’s, then benefits would have to be cut. So your Social Security benefit across the board for current and future recipients would be cut by a projected 23%. Now do we believe that’s going to happen? No. But the reality is any fix has to come from lawmakers in Congress. And if lawmakers in Congress have to change Social Security, the ways they’re going to choose to fix that are not going to be politically popular.

For instance, just last month there was a Republican proposal to raise the full retirement age to age 69. And it was met with a comment from one Democratic lawmaker that Republicans were trying to renege on a sacred promise made to Americans. Well, it’s being used for political gain but it doesn’t solve the problem. You’re either going to have to raise the retirement age. You’re going to have to raise taxes or a combination of both and other fixes in place.

And while it won’t get done any time soon, it should before the midnight hour. And if it does, I don’t think there’s really any serious threat to Social Security. But to your point on the cost of living adjustments, year to year it is always going to be figured on the tail end inflation data of the previous year. And obviously with inflation cooling, the cost of living adjustment’s going to be lower. And so you can never really count on your Social Security benefit keeping up with inflation.

RACHELLE AKUFFO: And to that point, I’m also looking at your notes here about Medicare. And you’re saying that health care costs could be the biggest expense that you’ll have in retirement. Talk about the changing dynamics there.

SCOTT INMAN: That’s the other thing too because when you talk about inflation and its connection to health care costs, health care costs are rising at a much bigger clip than food and energy prices usually are. In fact, a fidelity study out this year said that the average 65-year-old couple through the remainder of their retirement, through the remainder of their lives, can expect to pay out of pocket $315,000 in health care expenses.

Now that’s counting premiums and deductibles and coinsurance and all of that and prescription drugs and long term care. So people have this idea that once they reach Medicare age that everything’s covered. Clearly it’s not. And the premiums you pay have to be accounted for too and you to be careful about that too because the baseline premium for Medicare Part B. As you know, Medicare Part A is free but you pay for Medicare Part B beginning at age 65. And that’s $164.90 a month per person.

That’s pretty tolerable. But it also changes based on the amount of income you’re receiving. So if you’re a retiree that has a pretty big pension and you’re pulling pretty big money out of your 401(k)s or IRAs, your income could send you up to $428 in premium on a monthly basis for each member of that couple. So it gets to be pretty much a big cost potentially if you’re receiving high income. So there’s that.

So you have to have a plan for health care costs. In retirement, we recommend taking a look at HSAs in your pre-retirement years if you have access to one because that allows you to have tax-free money to pay for health care costs in retirement. And then the other thing is you have to have a plan for long term care. Medicare does not cover long term care coverage in a nursing home or other places. So you have to have a plan for that.

Do you have enough assets to self insure? Have bucket of money out there that is moderately invested that you can go to in your ’70s or ’80s whenever that long term care need arises? Or do you have to leverage an insurance company and buy a long term care insurance policy? You have to make that decision, and the best time to do that is before you reach age 65.

RACHELLE AKUFFO: And so for people who are wondering how they should go about this, I mean, some people are increasingly now taking out home equity loans. So what’s a smart way to do it so that you’re not really being penalized here but you can really try and figure out how to calculate what you’re going to need in terms of what Social Security won’t cover and what Medicaid won’t cover?

SCOTT INMAN: So for sure, Social Security is not even meant to cover all of your expenses or all of your lifestyle in retirement. The way we go about that, I would think of it like this, Rachelle. If you think of it as building a house, you put your foundation first down when you build a house. It’s not exciting but it’s the most important part of that house. The most important part of your retirement is your required income. What are you going to need in a month-to-month basis just to pay the bills?

What’s the cash outflow? You may have a mortgage, you may not, but you’re always going to have insurance and you’re always going to have taxes and utilities and food and gas and those things. Figure up that number and what you’re going to have there, does your Social Security checks and if you have any other guaranteed income sources available to you, will that meet your guaranteed income or your required income need?

If not, you’re going to have to find some way to fill that gap because your expenses need to be met with guaranteed income. You may need to look to something like an annuity with a portion of your assets to provide a rider that would allow you to fill that gap. Then the next step is your desired income. What do you want to do in retirement? What’s your lifestyle look like? On a month to month basis monetize that. How much extra money would you like to have in discretionary spending?

That’s the middle of the house, the framing of the house. And then the top of the house is your attic space, which is the stuff you put up there that you think you’re going to pass on someday. That’s your legacy. There’s a component to that too. Are you charitable minded? Do you want to make sure your kids have some money after you’re gone? You have to plan for that. But it all comes down to income.

People walk into our office a lot of times, Rachelle, and they say, hey, do I have enough to retire? That’s their first question. And maybe they have a million dollars, maybe they have $700,000. We can’t answer that question until we answer those income questions.

RACHELLE AKUFFO: And that makes sense because if you don’t know what life you want to live in retirement, then the numbers aren’t really going to mean much of anything. Lots of important context there, I know people appreciate it. A big thank you there to Scott Inman, General Financial Advisors Financial Advisor and host of Get Ready for the Future Show. Thank you so much.

SCOTT INMAN: Thank you.



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