Insights on spending in retirement

Transcription

1 Insights on spending in retirement

2 Agenda Spending in retirement may be different than you think Is your client a homebody or a globetrotter? Despite your paleo or Mediterranean diet, Medicare will be expensive Using profiles to help your clients 2

3 The Prosperous Retirement theoretical spending profile M Percent of pre-retirement spending 100% 90% 80% 70% 20%-30% Reduction in Spending? Healthcare /LTC 60% 50% Active Phase Go-Go Passive Phase Slow-Go Final Phase No-Go 40% 30% 20% 10% 0% Source: The Prosperous Retirement: Guide to the New Reality, Michael K. Stein, CFP, pp

4 Changes in spending 23 WHAT TO EXPECT Spending Household spending peaks at the age of 45, after which spending declines in all categories but health care and charitable contributions and gifts. Housing is the largest expense, even at older ages. 4 Source: J.P. Morgan Asset Management. Estimates based on average consumer expenditure from the 2014 Consumer Expenditure Survey (BLS) for each age group excluding pension contributions. Average household size for age is 2.8; age is 2.2; age is 1.9 and age 75+ is 1.6.

5 A historical view: The Silent Generation M Average spending patterns over seven 20-year rolling cohorts ( ) of the Silent Generation adjusted for inflation to 2013 dollars $57,771 $46,091 20% 29% $41,093 5 Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension and cash contributions, and including mortgage principal pay down in the housing category, BLS Data as of September Source: J.P. Morgan Asset Management

6 A mass affluent view: $1 2M in investable wealth M Average spending patterns of various age and asset groups Chase households $1M $2M in assets $140,000 $120,000 $116,640 $116,387 $108,726 $100,000 $93,850 $80,000 $83,919 $75,864 $71,144 $65,553 $66,926 $60,000 $40,000 $20,000 $ Age Health care Housing Education Food & Beverage Transportation Other Entertainment Apparel and services Travel 6 Based on Chase credit card, debit and DDA mortgage payments from 9/2012 8/2013 Source: J.P. Morgan Chase

7 Including spending insights into a retirement plan B Include health care separately $4,700 annual care costs per person at age 65 with a 7% inflation rate Growth in spending on other categories may be more muted Consider using a lower inflation rate 7

8 Agenda B Spending in retirement may be different than you think Is your client a homebody or a globetrotter? Addressing a common client fear: health care costs in retirement Using profiles to help your clients 8

9 Which of these households is most like the others? M 613,000 Chase households age 55+ in our cluster analysis 439,699 fit into profiles Foodies, 39% 39% Foodies Spend more on food & beverages + goods purchases in big box stores 4% Health care spenders Spend more on health care How many households fit into each profile? 29% Homebodies Spend more on mortgages, renovations, property taxes and furnishings 24% Snowflakes Unique and more difficult to profile 5% Globetrotters Spend more on travel 9

10 What does a Homebody look like? Homer & Heloise Annual Median Spending Age Age 68 and 67 Have a mortgage High property taxes Currently furnishing a recently purchased lake house They will stay home; family will visit More constrained spending on nonhousing related items and activities Fairly healthy 10

11 What does a Foodie look like? Gourmet Gregory Annual Median Spending Age Age 67 Mortgage paid off No vacation home Fairly frugal except for fine food and wine Orders specialty foods Likes to shop in big box stores His 32-year-old son moved out of the house 10 years ago when he was 57 11

12 What does a Globetrotter look like? Myron & Golda Annual Median Spending Age Both age 74 Lifelong travelers, last trip was a cruise to the Panama Canal, now planning for Iceland House and one car paid off many years ago (golf cart is also paid for) Good savings behavior earlier in life More constrained spending on nontravel related items and activities Fairly healthy and very happy 12

13 What does a Health care spender look like? Susie and Charles Annual Median Spending Age Charles is 72 and Susie and 70 They elected to use traditional Medicare, including a supplemental plan to cover some of their co-pays and deductibles Premium increases have been high for their supplemental plan Charles needs to take a fairly expensive prescription drug Other expenses are fairly low 13

14 Agenda Spending in retirement may be different than you think Is your client a homebody or a globetrotter? Addressing a common client fear: health care costs in retirement Using profiles to help your clients 14

15 Spending and inflation 12 Retirement landscape LOSING GROUND Inflation disproportionately affects older Americans due to differences in spending habits and price increases in those categories. 15 *There are no individual inflation measures for these specific subcategories. Source (top chart): BLS, 2014 Consumer Expenditure Survey. Charitable contributions include gifts to religious, educational and political organizations, and other cash gifts. Spending percentages may not equal 100% due to rounding. Source (bottom chart): BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represent annual percentage increase from December 1981 through December 2015 with the exception of entertainment and education, which date back to The inflation rate for the Other category is derived from personal care products and tobacco. Tobacco has experienced more than 7% inflation since 1986 but each age group only spends 0.5% - 0.8% on tobacco (27%-37% of combined personal care products and tobacco), which is a lower proportion than represented in the Other inflation rate.

16 Rising annual health care costs in retirement (traditional Medicare) 25 A GROWING CONCERN Spending Given the variability of health care costs, it may be prudent to assume an inflation rate of 7.0%, which means that you may need growth as well as current income from your portfolio in retirement. 16 Notes: In most states, older individuals have higher Medigap premiums. Exceptions: AR, CT, MA, ME, MN, NY, VT and WA have the same Medigap premiums for all ages. Most Medigap policies in AZ, FL, ID and MO will have the same premium for all those who first purchased Medigap at the same age of first purchase. Analysis includes Medigap Plan F (the most comprehensive plan). Parts B and D premiums are calculated from federal tax returns 2 years prior; individuals may file for an exception if they reduce or stop work. Age 85 estimated total median cost in 2016 is $7,490 (includes more prescription expense and higher Medigap premiums based on age). Modified Adjusted Gross Income (MAGI) is calculated by taking Adjusted Gross Income (AGI) and adding back certain deductions such as foreign earned income, taxexempt interest, taxable IRA contributions and Social Security payments. Source: Employee Benefit Research Institute (EBRI) data as of December 31, 2015; SelectQuote data as of December 31, 2015; J.P. Morgan analysis.

17 Variation in Medicare Advantage costs 26 DRAMATIC DIFFERENCES IN COSTS DEPENDING ON HEALTH Spending 50% of new Medicare beneficiaries choose Medicare Advantage, an alternative to traditional Medicare that is usually limited to a network of providers. Medicare Advantage out-of-pocket costs vary significantly, depending on health status and age. 17 Total costs = annual premium + out-of-pocket costs for those with relatively low costs (those in the lowest third of the cost distribution), median costs and high costs (those in the highest third of the cost distribution). Since plans are sold by private companies, premiums will vary based on geography and plan characteristics. Out-of-pocket expenses include co-pays and deductibles for Medicare Parts A & B, plus out-of-pocket prescription drug costs. By law, 2016 out-of-pocket costs may not exceed $6,700, but that does not include prescriptions. Those with high incomes pay higher premiums (above $85,000 single or $170,000 filing jointly). Age 85 estimated median cost in 2016 is $3,920. Cost estimates at age 85 in 2036 are adjusted for inflation and increased use of medical care at older ages. Employee Benefit Research Institute (EBRI) data as of December 31, 2015; SelectQuote data as of December 31, 2015; J.P. Morgan analysis.

18 Long-term care planning 27 LONG-TERM VISION Many individuals will need long-term care, which often starts with home care and progresses to a nursing home. Spending There is a 1 in 3 chance that a longterm care need will last less than 6 months, but there is a 1 in 10 chance it will last 5 or more years. 18 Source: American Association for Long-Term Care Insurance 2014 Sourcebook. Annualized inflation : 3.81% nursing home care; 1.67% home health care.

19 Annual cost of nursing home care (private room) 28 THE COST OF CARE Many people realize nursing home care is expensive, but there is significant cost variation depending on where care is utilized. Spending 19 Source: New York Life Insurance 2014 Cost of Care Survey developed in partnership with Univita. Average daily costs annualized over 365 days and weighted by city population for each state.

20 Agenda B Spending in retirement may be different than you think Is your client a homebody or a globetrotter? Addressing a common client fear: health care costs in retirement Using profiles to help your clients 20

21 Using the profiles to help clients B Get housing expenses right Have you paid off your mortgage? Do you have a vacation home or are you going to buy one? Do you have high property taxes? Are you planning a renovation? Will you have rental income or do you plan to downsize? What categories will decline? Have you paid off your mortgage? Will you have fewer work-related expenses such as commuting and clothing? Will you eventually spend less supporting family? Plan for increasing travel costs Do you plan to travel as long as you are healthy? What trips are on your bucket list? Do you travel when you get the chance now? Proactively address health care costs Do you have a cushion to pay for health care expenses? Do you already use expensive prescription drugs? Are you concerned about your ability to cover health care costs? 21

22 Using the profiles to help clients M Will your client fit in this profile in retirement? High housing expenses Many don t travel a lot in retirement, except to a second home What to ask Current & planned: continuing mortgage, high property taxes, vacation home, renovation, downsizing, rental income? How to include in a retirement plan Incorporate changes into the plan, including planned changes such as eventually paying off a mortgage Low housing expenses Frugal (big box store shopper) and/or food is the major expense They may have decreasing household size as they age Currently travel when they get the chance Want to travel in retirement Savings behaviors may enable travel Poor health Health care expenses are a large part of overall spending Will you be paying off your mortgage? Do you plan to reduce expenses at retirement? Children leaving the nest? When was your last vacation and where did you go? How much do you plan to travel in retirement? Are you concerned about health care costs? Do you need a cushion to cover the possibility of a large health care expense? Don t fit easily into other profiles What do you plan to do with your time in retirement? Plan for health care expenses separately Consider using a lower inflation rate for other expenses or reducing expenses at retirement Account for travel separately, including travel expenses increasing at retirement and continuing with age Plan for Medicare: $4,400 per person annually, 7% inflation Develop a plan for possible longterm care costs Account for unusual plans Consider using your firm s standard rate of inflation 22

23 Thank you 23

24 J.P. Morgan Asset Management Index definitions 45 Reference 24

25 J.P. Morgan Asset Management Disclosures 46 Reference 25

26 Appendix 26

27 What is Medicare? 40 Reference 27 *Medicare does not cover most long-term care costs. Medicare does pay for medically necessary skilled nursing facility or home health care on a very limited basis. Custodial care is not covered.

28 65 and working: Should I sign up for Medicare? 41 WHAT IF I HAVE COBRA OR RETIREE COVERAGE? You must sign up for Medicare when you are first eligible, or you will face late enrollment penalties for Part B and possible underwriting for Medigap if you sign up for these later. Most retiree coverage works with Medicare Parts A and B (check with your plan administrator). Reference If your COBRA coverage (a temporary extension of your employer coverage) or retiree prescription plan will continue and is creditable (ask your plan administrator for documentation), you may choose to delay enrollment in Part D without penalty Most employer coverage for <20 people will end at age 65 or become secondary after Medicare has paid. Late penalties will apply if you don t sign up in your initial enrollment window and Medigap plans may deny coverage or underwrite after the initial enrollment period. For more information see sponsored by the National Council on Aging and Medicare.gov.

29 Many individuals will need at least some assistance M Lifetime chance of needing some assistance: age 65 > 5 years 11% 28% 2 5 years 17% 22% Spending 1 2 years 10% 13% Men Women < 1 year 16% 19% Won't need care 21% 42% 1.) Includes needing help with 1 activity of daily living or 4 or more instrumental activities of daily living such as using the phone, paying bills, shopping for groceries, managing medication, cooking, and driving or using public transportation or having a long-term care claim 29 Source: Long-term care over an uncertain future; what can current retirees expect? Winter Peter Kemper, Harriett L. Komisar, Lisa Alecxih.

30 Long-term care planning: annual cost for home health aide M Annual home health aide costs National average: $22 per hour $208,000 $40 per hr. $83,200 $31,200 Spending $22 per hr $25,168 $45,760 $114, hours per week 40 hours per week 15 hours per week $83,200 $16 per hr $33,280 $12,480 $- $50,000 $100,000 $150,000 $200,000 $250, Source: national average cost per hour: New York Life Insurance 2014 Cost of Care Survey developed in partnership with Univita. J.P. Morgan calculations for the annual home health aide costs.