Morningstar - Q4 2020 - 33

HSA

Value After
Contribution

Medicare Part B and D coverage, also affects
out-of-pocket expenses for high-income retirees.
Those extra premiums (Medicare's Income-Related
Monthly Adjustment Amounts, or IRMAA) kick in
for single filers with more than $87,000 in income
and joint filers with $174,000 in income. Older
adults, especially those without long-term care
insurance, are also contending with the wild card
of high out-of-pocket costs toward the end of life.
Advisors can assist their retired clients by helping
them budget for healthcare expenditures
based on their health histories, the presence of
supplemental coverage, and whether IRMAA
applies. Advisors can also serve a valuable role in
helping retired clients source the funds for
healthcare outlays. HSA assets, for example,
should usually be spent during the client's lifetime
because their tax benefits disappear when
inherited by someone other than a spouse. If a
client has extremely heavy healthcare outlays-
as is typical when a long-term care need
arises-it's usually desirable to spend those
assets with heavy tax consequences. That's
because tax deductions for healthcare outlays can
offset the taxes due on the withdrawals.

IRA & 401(k)

Not Taxed
$5,000

Roth
$9,301

$16,036

Not Taxed
Value After
Taxed
Contribution
$5,000
$3,900
Initial Retirement Spending Goals
$25,000
$50,000 Value $100,000
Value with Interest
with Interest

Value After
Contribution

Value with Interest
and Investment Growth
and InvestmentEXHIBIT
Growth
and Investment Growth
3
$16,036
$16,036
$12,508
with the financial crisis of 2007-09, when older
Retirement Mirage People
on average

adults
maintained
higher
levels
employment
USED
FOR
NOT USED
FORofQUALIFIED
retire four years earlier than they
MEDICAL
EXPENSES
-19 crisis
thanQUALIFIED
younger age cohorts,
the COVID
planned (Panel A); overall, about half
MEDICAL
BEFORE
AFTER
has EXPENSES
thus far had a disproportionate
effect on older
AGE 65
AGE 65
of workers retire sooner than they
workers. While workers under age 34 have
expected (Panel B). The pandemic may
been the most affected by job loss during the
pandemic, the next hardest-hit age band
cause workers to retire even sooner
is workers
age 55 and
older, according
to the U.SWithdrawal
.
Withdrawal
Withdrawal
Withdrawal
Withdrawal
than they planned, putting
more
Bureau
Labor Statistics.
By contrast,
workers
Taxed
Not
Taxed
NotofTaxed
Taxed
Taxed
pressure on their retirement portfolios
between 35 and 54 have remained employed
to last longer.
65
70
75
80
at relatively higher rates.
Age
$12,508
$12,508
$16,036
$9,301
$12,508
Some of these newly unemployed older adults
may be assessing whether they can replace
the jobs
they've lost;
a segment
of those
Initial
Retirement
Spending
Goals
individuals
may
be
considering
whether
$25,000
$50,000
$100,000 early
retirement is an option. During the 2007-09
recession, for example, adults ages 62 and older
were the least likely age group to become
re-employed once they lost their jobs, according
to research conducted by the Urban Institute.
Roughly one third found jobs within one year of
becoming unemployed, and about 40% became
re-employed within 18 months of the job loss.
The study's authors conjectured that the ability
to take Social Security at age 62, albeit with
a reduced benefit, likely prompted some of these
people to end their careers earlier than they
65
70
75
80
might
Age have expected.
At the same time, it's worth noting that early
retirement isn't exclusively a bear-market/
Avg. Actual Retirement Age Among Retirees
recessionary
phenomenon.
Research
conducted
Avg. Expected
Age Among
Nonretirees
by Morningstar's Blanchett concluded that
68
workers retire about four years earlier than they
expected, on average. Before retirement,
the typical worker estimated retirement at age 66
65, whereas the actual average retirement 65
date was 61, according to Blanchett's research
64
( E X H I B IT 3 ).9
Butabout
earlyfour
retirement
isn't always in an individual's62
years early.
best interest. Rather, working even a few 61
years longer than the traditional retirement age
60
of 65 can be hugely beneficial to the health
of a retirement plan, and early retirement poses 58
challenges to a plan's2011
sustainability.2019
It can
2002
truncate opportunities for additional retirement

85

Panel A

Avg. Actual Retirement Age Among Retirees
Avg. Expected Age Among Nonretirees
Real Spending Level
68
$1.20

Ea

1.03 66
65
0.88
On average, people retire

Source:
Morningstar.
about
four years early.

61
0.75

85
2002

90

95

1.00
64
62
0.80
60
0.60
58

100
2019

2011

1991

Panel B

Earlier

On Track

Later

% of Total
60
48
46
40

Nearly half retire earlier
than expected.

On average, people retire

Early Retirement and Impact on Older Workers
In addition to its impact on emergency savings and
healthcare spending, the current economic
crisis will likely have implications for retirement
planning for many individuals. In contrast

$12,508

$12,508

20
6
0
1991

2006

2020

Source: Morningstar.

9 Blanchett, D. 2018. "The Retirement Mirage." Morningstar White Paper.

morningstar.com/lp/magazine

33


http://www.morningstar.com/lp/magazine

Morningstar - Q4 2020

Table of Contents for the Digital Edition of Morningstar - Q4 2020

Contents
Morningstar - Q4 2020 - CT1
Morningstar - Q4 2020 - CT2
Morningstar - Q4 2020 - Cover1
Morningstar - Q4 2020 - Cover2
Morningstar - Q4 2020 - 1
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Morningstar - Q4 2020 - Contents
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