Soaring everyday expenses are straining retirement readiness

• What’s at stake: As inflation and other pressures make saving harder, advisors are increasingly being asked to help clients prepare for healthcare expenses, taxes and other retirement costs.
• Expert quote: "The purview of the financial planner is growing broader and wider." — Catherine Collinson, president and CEO of Transamerica Institute and Transamerica Center for Retirement Studies

Rising living expenses are making it harder for nearly 8 in 10 U.S. workers to save for retirement, according to a report from the Transamerica Center for Retirement Studies. That strain is expanding the range of issues advisors need to address, including inflation, taxes, Medicare and more.

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"The purview of the financial planner is growing broader and wider," Transamerica Institute and TCRS President and CEO Catherine Collinson said in an interview with Financial Planning. She said the change is driven in part by the growing importance of "human capital" in financial advice.

Transamerica’s research found that retirement-saving pressure is widespread, though it differs by generation. Among respondents, 82% of Generation Z, 78% of millennials, 80% of Generation X and 68% of baby boomers said they somewhat or strongly agreed that the current cost of living makes it difficult to save for retirement. Overall, 78% of American workers said high living costs are making saving harder.

TCRS, a nonprofit division of the Transamerica Institute funded by contributions from the Transamerica Foundation, Transamerica Corporation and affiliated entities, researches retirement security and educates the public on the topic.

The report also examined how older workers expect to fund retirement. Among baby boomers, 27% said income from 401(k)s, 403(b)s and IRAs will be their main source of retirement income, while 38% of Generation X workers expect self-funded savings from those accounts to be their primary source.

Forty-two percent of baby boomers and 27% of Generation X said they expect to rely mainly on Social Security. Seven percent of baby boomers and 11% of Generation X expect to depend on earnings from continued work, while only 5% of each group expect a company pension to be their main source of income.

Because Roth IRAs were not introduced until 1997, much of the savings held by Generation X and baby boomers is in tax-deferred accounts, which makes withdrawal strategy especially important to avoid moving into higher tax brackets, Collinson said.

"They also have the ability to not take withdrawals all the way up to their [required minimum distribution] age," she said. "And with an eye toward making their savings last, it is as much a tax planning exercise as a saving and investment strategy exercise."

Working longer and delaying retirement is "easier said than done," Collinson said.

For younger households, cash flow is often absorbed by mortgage payments as well as insurance and maintenance costs tied to homeownership, said Andrew Palmer, senior managing director at registered investment adviser MAI Capital Management in Los Angeles. He said many have a difficult time beginning retirement savings when housing is already unaffordable.

"Without parents that are supporting them, I think it's almost impossible, so they're relegated to the rental market, and the rental market is insane," Palmer said.

Healthcare costs

Beyond taxes and housing, healthcare remains one of the biggest expenses in retirement. Collinson said advisors should have at least a basic understanding of Medicare.

"Between the Medicare alphabet and the nuances of Medicare Advantage plans, just raising awareness among clients that this is a lot more complicated than [it might seem] at face value can be very helpful," she added.

Long-term care can be even more difficult to plan for. Collinson said preparing for those costs may be "the hardest part of all."

Advisors can help clients think ahead about what they would do if their health declined, including comparing assisted living with aging at home, estimating the costs, and saving for those expenses and, if possible, insuring against them, she said.

"Who, what, where, when and how would they turn to for such care?" she asked. "How would they fund that care? Nobody's going to give you a loan to pay for your nursing home. You're not a good credit risk at that point, and that sounds callous, but if somebody is aging, and if health declines … what types of options are available?"