Providing financial and physical shelter
Covering your bases, for whatever bad turns your life might take
Home Topical Index to all subjects
It would not be hard to identify a dozen or more risks that are either directly financial, or are not primarily financial but have big financial implications. The resources on this page deal with that second category (the directly financial risks are dealt with in the Managing Money section).
The “life risks,” as we might call them, are related to our physical well-being. If we die too soon, we could deprive those who are dependent on us. If we live too long, we could run out of money ourselves. If we become ill or infirm, or someone dependent on us does, we might rack up medical and care expenses that cripple the family finances.
Dealing with risk generally means taking reasonable steps to prevent bad events, making sure we have provided (to the extent we prudently can) in case the bad event happens anyway, and beyond that, hoping for the best.
We are lucky to live in a society where charitable and governmental agencies can usually supply the necessities of life, if we are extremely unlucky and become truly destitute. And most of us also have family or friends who would help out, at least temporarily until we could rally those societal resources around us. So we don’t have to prepare for the truly worst case scenarios, unless we choose to. Still, most of us prefer not to rely on those final societal safety nets if we can avoid it. Nor do we want to create massive burdens for our loved ones. So we best serve ourselves and others if we take reasonable steps to make sure that we are covered for at least the most probable adverse events.
Managing Risk relates to other areas of Security:
- Managing money, because many of the risks we face are financial in nature. And because prudent money management will help assure that you have something extra to fall back on if luck runs against you.
- Your home, because where, how, and with whom you live affects your ability to cope with adversity, because excessive home expenses increase your exposure to financial and life risks, and because home equity, if you have it, can serve as a financial resource of last resort.
Managing Risk relates to other areas besides Security:
- Spirit, because illness, incapacity, and death are issues that religion and philosophy have dealt with for millennia, and these disciplines – and the practices that go with them – can help alleviate the pain caused by such adverse events.
- Purpose, because our engagement in paid work, and the connections we make in volunteer and civic activities, can improve the financial and social resources we have for coping with risk.
- Love, because our commitment to others impels us to shelter them from risk, where we can. And because those who are committed to us can become our most potent sources of strength, comfort, and tangible assistance when we most need it.
- Avocation, because the expenses associated with our avocations can deplete our resources and increase our exposure to risk. And because the loss of our good health or the loss of a spouse or other loved one can be dealt with better if we have nurtured a range of interests and activities for ourselves – including some that we can continue when we are lacking in funds, when we are partially incapacitated, and/or when a beloved companion is no longer there to share them with us.
- Health, because the life risks discussed on this page are intimately tied to our physical well-being, and the timing of our demise.
Managing Risk Sub-Topics and Resources
- The risk of dying too soon: Understanding the financial and personal consequences of death, and causing the least suffering for your survivors.
The financial consequences of dying before you expect to are not always severe, but they can be. Fortunately, if someone you care about is at significant financial risk if you die first, or if you yourself are at risk if your spouse or other living companion dies, you probably can buy life insurance to help cover that risk – unless the party needing the insurance is disqualified by already being severely ill. Conversely, you may have more insurance than you need, in which case it may or may not be a good idea to get rid of it (many forms of life insurance have cash values that can grow free of federal income taxes).
The non-financial consequences of a death in the family can be even more devastating, of course. These, along with information about legal and funeral arrangements, are covered in other pages, listed under “See also,” below.
- Concepts and resources:
- Will the government provide? The Social Security System pays survivor benefits to widows and widowers, and for dependent children, if you have any, but these benefits are modest in amount. See the Social Security Administration website on Social Security Survivors Benefits for more information, and for a link to a calculator that can estimate benefits (rating = A+). If you are already receiving retirement benefits, however, different rules apply, and in general your spouse can continue to receive the same benefit you were receiving, or s/he can receive the benefit earned by his/her own employment history, whichever is greater. So if both of you have been receiving benefits, the survivor will receive the greater of the two, but not both. Depending on your other sources of income, and whether household expenses will drop dramatically when one person dies, the government benefits may be adequate, or they may not be. But government benefits alone do not support even a moderately affluent lifestyle.
- Pension and annuity options. If you have a traditional pension (the kind that pays you a monthly benefit for life, when you retire) or if you have a 401(k), 403(b), IRA, privately owned annuity, or other account that is convertible to a guaranteed lifetime income, you generally have several options. You can get payments just for your own lifetime, for your lifetime with a guaranteed minimum number of payments (which would go to your beneficiary if you died before all the guaranteed payments are made), or for a combination of your lifetime and that of a spouse or other beneficiary – sometimes with a reduction in the payments after one of you dies. If you have already selected an option for such an account, then you should know, or can easily find out, whether your family is at risk depending on who dies first. If you have not yet made such choices, the RetirementWorks II software referred to in the following paragraph can help you choose the most prudent pension plan option (rating = A).
- Do you need more life insurance? Most people heading into retirement, or already there, do not need more life insurance, but there are plenty of exceptions. If most of the household income derives from pension benefits that will end if one party dies first, the other could be left high and dry. If you still have a large mortgage or other debts, if you have dependent children who for whatever reason need to be provided for, if you own a business that you want to keep going, if you are affluent enough to be facing large estate taxes upon death, or if you want to leave significant bequests to your heirs or your favorite church, school, or charity – these are all reasons why you might need more insurance than you have. So it is hard to evaluate, without doing a fairly detailed analysis of your overall situation. “RetirementWorks II” is our recommended software for people in the older age groups; it will provide an answer to this question among many others, so it is well worth the discounted price of $109 for people who find it via these Retirement Readiness pages – just remember to use Discount Code RRR109. Annual renewals are $44.50 (rating = A). If you do need more life insurance, “Life Insurance during Retirement: Basics You Need to Know” will explain your main options, and the next steps you should take (rating = A), or if you want to delve more deeply, Questions and Answers on Life Insurance: The Life Insurance Toolbook by Tony Steuer (rating = A+). See also, “I’m Retired – Do I Still Need Life Insurance?,” at About.com (rating = A-). You can also consult a life insurance agent to help you understand your needs, but keep in mind that insurance people make money from selling insurance and keeping it in force, so it is good to also have an objective opinion from another source.
- Do you need less life insurance? In most families, the need for life insurance decreases at retirement. You can use the same software and the same article on life insurance basics that is referenced in the preceding paragraph to help you determine whether you still own life insurance policies you don’t need, and if so, what your options are for keeping or disposing of them.
- See also:
Most of us wish for a long life, but it can put a strain on our financial resources. If we choose to (or just need to) gradually spend some of our savings every year, then as our assets decline, so does our interest or investment income. And as our income declines, we have to take more out of savings. So eventually the decline in our assets accelerates, and if we live long enough, it’s all gone.
But if we don’t spend any of our savings, and instead just live off the income, we have less to spend every year, and our standard of living has to be lower. And it can drop still further, over time, because our income is more or less fixed, while inflation continues to push our expenses up. This effect lessens eventually, since the elderly are not as able or as interested in going out and spending money – though some expenses, like housing (rent, property taxes, utilities) and medical expenses tend to keep going up. Overall, it can be hard to live on a completely static income.
So “living too long” can definitely strain your finances, unless you are affluent enough so that you just don’t have to worry about it. This section helps you further understand this risk and ways to cope with it.
- Concepts and resources:
- You might live a lot longer than you think. We have been hearing for most of our lives that normal life expectancy is somewhere in the 70s, but that is life expectancy at birth. If you have already survived the risk of infant mortality, the diseases of childhood, the accidents of youth, and the occasional deadly surprises of middle age, then your life expectancy is probably now well into your 80s. And if you are married, odds are quite good that at least one of you will live into your 90s. To get a better idea of what your life expectancy really is, try the free “How Long Will I Live?” Life Expectancy Calculator from the University of Pennsylvania (rating = A), or the popular "Real Age" test, though this one requires you to register and provide personal contact information (rating = A). Note that you may get quite different results from these tests, and that neither should be taken too seriously (the historical data needed to do these estimates really accurately does not exist). In any case, keep in mind that whatever your life expectancy is, “life expectancy” means that half of people like you live longer than that, and these days more and more people live to be 100 or older. For a general sense of a person's chances of living to different ages, see “What Is Your Life Expectancy?” from RetirementWorks, Inc. (rating = A).
- Evaluating the risk. There are some fairly simple ways to figure out if you are likely to run out of money at some point, but they don’t work well, unless you have either way more or way less than you really need. Life is too complicated, and in retirement your ability to compensate later for excessive optimism today is too limited, for it to be safe to rely on simplistic methods. Properly evaluating your risk means understanding all of your financial resources (assets, income, insurance, government benefits, employee benefits, possible inheritances, etc.) as well as all of your financial liabilities (mortgages and other debts, expenses, expected future expenses), and risks of personal, family, or societal events that could affect you (inflation, changes in the financial markets, illness, death, etc.). Only very thorough and very smart software can help you with this analysis, which is why we recommend “RetirementWorks II” (available at the discounted price of $109 for people who find it via these Retirement Readiness pages – just remember to use Discount Code RRR109. Annual renewals are $44.50 – rating = A+).
Many financial companies use mathematically sophisticated investment-related models to estimate how much you can safely withdraw from your savings every year so that you are unlikely to run out of money, but these models are not actually up to the task and in fact are quite dangerous for your financial health (for a further explanation, see “Piercing the Monte Carlo Mystique in Retirement Income Planning,” on the Still River Retirement Planning Software website – rating = A).
- Social Security benefits. Most people in the U.S. are eligible for Social Security retirement benefits, based on either their own earnings or a spouse’s earnings. No one gets rich on Social Security, but it can cover basic expenses, it will pay you for as long as you live, and benefits go up with inflation. You can increase your benefits, in most cases, by working longer and thus continuing to pay into the system, and also by postponing signing up for benefits. “Normal Retirement Age” under Social Security is age 66 to 67, depending on what year you were born. You can start collecting retirement benefits as early as age 62, but your benefit amount is severely reduced if you do. You can also delay until age 70 and get an increase for each year that you delay – but then, of course, if you start later you do not get as many checks. So the game is to balance whether you are better off getting more smaller checks or fewer bigger ones. For the typical person, the best bet is to retire at or near the official Normal Retirement Age.
But there are a lot of exceptions to that. The RetirementWorks II software referred to under ”Evaluating the Risk,” above, will make a specific recommendation for you – and your spouse, if you have one, taking into account his/her own earned benefits as well as benefits each of you might be eligible for based on the other’s employment. Or if you want a sophisticated calculator that will do only Social Security calculations, for $40 you can get access to “Maximize My Social Security” from ESPlanner (rating = A). The Social Security Administration’s “Estimate Your Retirement Benefits” calculator can help you figure out what you might get at different ages (though it won’t help as much with the complications of married couples – so, rating = A-), or your local Social Security office can help you (use the “Social Security Office Locator” to find it). Financial companies are increasingly offering free Social Security calculators, but it is hard to judge their quality. For general information, including information on how to apply for Social Security, see the Social Security “Plan For Your Retirement” page (rating = A). And for a write up on considerations relating to the best age to apply for benefits, try “When To Take Social Security: It Pays to Wait,” from the National Academy of Social Insurance (rating = A). If you want to dig into Social Security more deeply, consult Social Security, Medicare & Government Pensions: Get the Most out of Your Retirement & Medical Benefits, by Joseph Matthews and Dorothy Matthews Berman (rating = A). We do suggest, however, that you be wary of strategies that rely on arcane rules that could be changed in the next few years, since Congress is likely to be looking at some kind of overhaul soon, and these loopholes could be the first things to go.
- Social Security solvency. There is a lot of scary information out there about the solvency of Social Security, but retirement benefits, unlike Medicare benefits, are relatively secure. The latest projections are that the retirement fund will be “exhausted” in 2033 – which means that most people who are already retired, or retiring soon, will not outlive it. But benefits would continue even after the fund was “exhausted,” because current workers continue to pay money into the system, and those funds would immediately be paid out to retirees and other beneficiaries – though benefits would have to be reduced, probably by about 25%. But it is also unlikely that Congress will allow that to happen, since retirees are a politically powerful voting bloc – and growing in size all the time. It is hard to predict what will happen, but it is more likely that there will be slowdown in the rate of increase of benefits, rather than an actual reduction in benefits – and that any actual reductions that occur will affect future retirees, not current retirees. Despite all this, there of course always remains some risk that Social Security will fail, but this should actually be among the least of your worries. For more technical analysis, see the Social Security “Trust Fund Solvency” webpage, which links you to the latest official reports (rating = A).
- Pension solvency. If you have a traditional pension that pays a monthly amount during retirement, you are usually entitled to an income for life. But whether you get it depends on whether the pension fund stays solvent. Many pension funds, both government-sponsored and corporate, are technically “underfunded,” in that they already have made more promises to current and future retirees than they currently have assets to pay. This means they are dependent on future payments into the funds. For government-sponsored plans, these payments are likely to be made, at least to the extent that current retirees will continue to receive promised benefits (future retirees might take a hit, though). In the private sector, however, if a corporation goes out of business, there may be no new money coming in, and all beneficiaries are at risk.
The Pension Benefit Guaranty Corporation (PBGC) was set up by the government to provide continued benefits in these cases, but these benefits have a limit. For example, in 2014, the limit for people retiring at age 65 is a little less than $59,320 a year, so if your pension plan goes under and you retire at 65 with more than that amount due to you, your benefit will be reduced. There is not much else you can do about this risk, and even big plans can become insolvent quickly when an employer suddenly goes bankrupt – which history tells us can happen even to the oldest and largest firms. For more information, see the PBGC webpage for “Workers & Retirees” (rating = A). And if you receive reports from your pension fund concerning their solvency, pay attention to them – if they seem too confusing, ask someone you know who is financially savvy to look at them for you.
Note, however, that these problems rarely apply to 401(k), 403(b), IRA or other “defined contribution” plans where you have a personal account balance, because such balances are essentially yours and are protected by federal law.
Also, when you think about pensions, don't forget about organizations that you (or your spouse, even if deceased or divorced) worked for years ago - contact them and see if you are entitled to a pension or other benefits.
- Annuities. Annuities come in many flavors, but the key point here is that you can turn some of your assets over to an insurance company in return for their promise to pay you a certain amount of money every month for the rest of your life – no matter how long you live (and if you have a spouse or partner, you can cover both parties under one contract, so that income continues as long as either of you remains alive). This is an ideal solution to the risk of “living too long,” except that you do give up control over some of your funds. There is also the question of what is the right age to purchase an annuity – if you do it sooner, you will get more payments, but the insurance company won’t pay as much every month. If you start later, you get more each month.
For general information on annuities and your decisions about them, see “Annuities: Basics You Need to Know,” from RetirementWorks, Inc. (rating = A); and you can also use the RetirementWorks II software referred to under the “Evaluating the Risk” paragraph above, which will recommend the purchase of income annuities if that appears to be a prudent choice for you. For more detailed information, check out Annuities For Dummies by Kerry H. Pechter (rating = A). Income annuity rates change as interest rates change, so it is best to purchase them when interest rates are high – see the “Instant Annuity Quote Calculator” for a quick idea of what kind of benefit you could get currently, though you will have to provide personal information to see quotes from specific providers (rating = A).
- Investment strategies. The traditional strategy for retirees has long been to invest conservatively and preserve your capital by just living off the interest – or if it becomes necessary to dip into your assets, to do so as little as possible, and replace it later if you can. In the past decade or so, investment firms have been arguing that you should invest more aggressively, because living a long time means needing to beat inflation. But these recommendation are self-serving for investment providers, and are dangerous to retirees. It is not prudent to try to overcome one risk (inflation) by substituting an even bigger risk (investment volatility). Regarding this and other plausible but dangerous investment ideas for retirees, see “Half-Baked Investment Concepts for Retirees,” from Still River Retirement Planning Software, Inc. (rating = A. Note that this paper came out before the big recession, so it is based on foresight, not hindsight).
One new development in the investment arena that might pan out is the idea of mutual funds combined with insurance that guarantees that you won’t lose money, or even that guarantees a minimum rate of return. You would have to pay the cost of the insurance in some fashion, and it probably would take a big bite out of your proceeds, so it is too early to get excited about this concept. But it might be a way of guaranteeing some level of lifetime income while still not being totally left behind if the financial markets soar. If this idea intrigues you, consult your investment specialist.
As noted a few paragraphs above, under “Evaluating the Risk,” the models the investment companies use to help you manage to gradually spend down your savings are not reliable (as many people learned the hard way in the recent recession). If you have moderately substantial funds you need to invest in retirement, you probably should get professional advice, but you will do well to find an advisor who believes in safety first, when it comes to retirees, and you will probably have to ask around a bit before you find such a person. Also see our section on Security / Managing Money / Savings and investment.
- What to do if you are running out of funds. First, you can probably avoid this situation if you track your financial situation by reviewing it at least once a year, and definitely whenever there is some dramatic change (a death, a divorce, an illness, a market crash, etc.). This will enable you to see a problem starting to form and will position you to address it before it becomes an emergency. Second, running out of funds does not necessarily mean running out of income – if you still have Social Security, a pension, and/or other forms of income, you might have to move someplace cheaper (or share living quarters with someone), and perhaps cuts costs in other ways, but you are not truly broke. Third, if you are truly broke, there are lots of steps you can take and places you can go for help – see “What if You Run Out of Money?” from RetirementWorks, Inc., for ideas and references to other sources (rating = A), and also check the National Council on Aging “Benefits Checkup” page, for references to government and private programs you may have access to (rating = A).
- See also:
Unlike many countries, the U.S. does not provide free medical care for most people. This matters more as we age, since we are more prone to both chronic and acute medical problems, and prescription drugs and medical care continue to get more and more expensive. So it's important to understand what benefits you're entitled to, and what options you have that can help you fill in for coverage you lack.
If you are still employed, there is a reasonable chance that you (and perhaps your dependents) receive free or subsidized health care coverage through your work. But if you stop working before you are 65, you could have a period of time during which you need individual coverage.
- Free resources:
- General information on health insurance, including a free toolkit to help you organize your medical records and understand your healthcare and health insurance options in your retirement and pre-retirement years, is available at “GoodCare.com,” a consultancy that does not sell health insurance plans, and which may therefore be more objective (rating = A). For information about "Obamacare", which is now available to most people who are not already covered elsewhere (with subsidies for lower income people), see the “HealthCare.gov website (rating=A)
- Medicare provides extensive (though not absolutely complete) medical coverage for virtually all U.S. citizens age 65 and up. “Medicare.gov,” the official website, is a font of information in English and Spanish, and should be your first stop, if you need to learn about the program or have specific questions.(rating = A), with the privately funded “Medicare.org” being another good resource for you (rating = A). Medicaid is state-provided (but federally supported) medical care for the poor. You can learn more about Medicaid (known as Medical in California), as well as Medicare programs, at the “Centers for Medicare and Medicaid Services” website (rating = A). Also if you cannot afford the prescription drugs you need under Medicare, you may be eligible for their "extra help" program (1-800-772-1213, or visit http://www.socialsecurity.gov/prescriptionhelp/). The “Center for Medicare Advocacy” offers additional information about Medicare, including the ongoing implementation of the 2010 health care reform act (rating = A).
- Medigap and other private medical insurance is also an important topic, since Medicare doesn’t cover all medical care costs, and does not cover you before age 65. For basic general information on this subject, check out “Medical Insurance for Retirees: Basics You Need to Know,” from RetirementWorks, Inc. (rating = A). The latest information about choosing a Medigap policy (i.e., one designed to cover gaps in Medicare) can be found through the government page on “Supplements & Other Insurance” (rating = A+). You can get a variety of price quotes on Medigap insurance policies for any state at “Medigap.com,” but you should expect to have to provide your contact information followed by inquiries back from a broker (rating = A-). For people retiring before age 65, a different solution is needed. See “Health Insurance Solutions for Early Retirees,” from About.com, and “8 Tips for Paying for Health Care in Retirement” from Emily Brandon for U.S. News & World Report, for basic information and some worthwhile tips (ratings = A-), but also use the Obamacare site referenced two paragraphs above.
- Long-term care insurance, which normally covers extended periods of care in nursing homes, assisted living facilities, and/or in-home care, is worth considering because Medicare does not cover it, and such care can break the bank if you’re not prepared for it. In theory, most people should own such insurance, but it is expensive enough so that paying the premiums can seriously cramp the average family’s lifestyle, especially if you don’t purchase it until you are pushing 60, or even older (annual premiums are a lot lower if you buy such insurance young). Meanwhile, you may have other assets or income sources – such as home equity – that could enable you to pay for long-term care, and you may have a spouse, partner, or other family members who could help provide you with care if your needs are not too grave. Since this is such a complicated situation to figure out, we recommend “RetirementWorks II” software, which deals with this issue as well as many others, and can analyze your need (or lack of need) for long-term care insurance in the context of your entire financial picture (available at the discounted price of $109 for people who find it via these Retirement Readiness pages – just remember to use Discount Code RRR109. Annual renewals are $44.50 – rating = A). For general information on long-term care insurance, see the “Guide to Long-Term Care Insurance” (rating = A), or “Long-Term Care Insurance: Basics You Need to Know” from RetirementWorks (rating = A). Also note that wartime veterans and their surviving spouses are entitled to benefits; see the VeteranAid.org "Aid & Attendance Benefit" website (rating = A).
- Advance Directives (living wills and health care proxies) state the conditions under which you would want treatment, especially extraordinary treatment, or under which you would want or not want to be kept alive artificially. They can also designate someone else to legally make medical decisions for you if you are incapable of making them for yourself. Durable powers of attorney enable someone else to take care of other aspects of your life, if you are incapable. It is important to have such documents in place, because otherwise, if an applicable situation arises, even your closest family may not have any say: medical decisions will be made according to generic hospital practices, which might not be at all what you would want, and your financial and other affairs may fall into disarray. “Living Wills and Beyond: Planning for Possible Future Incapacity,” from RetirementWorks, Inc., explains more about the need for such documents, and connects you with (mostly free) resources you can use to create the documents you need.
- Other resources:
- See also:
©2016 Still River Retirement Planning Software, Inc. / RetirementWORKS, Inc.