Attention Retirees! Your Retirement Benefits Could Be in Danger

Kraft Heinz (KHC) just moved the goalpost on its retired employees, pushing them onto the individual healthcare marketplace. The move, which has been pushed by hedge fund 3G Capital, will reduce Kraft Heinz’s open-ended liability to its retirees, which should keep shareholders happy.

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But for the ex-employees, the sudden change in their retirement benefits is akin to scoring a game-winning touchdown, only to have it arbitrarily called back.

(My beloved TCU Horned Frogs are contending for the championship this year, so I feel that football metaphors are appropriate. “Moving the goalpost” is originally a British soccer analogy, but who’s counting?)

Kraft Heinz claims that the new retirement benefits will be “equal or better” than traditional group coverage at a “similar or even lower cost.”

We’ll see about that.

It might end up being true, but in my experience, paying more and getting less in health coverage via the “Obamacare” exchanges has trained me to be a little skeptical. And for baby boomers in or near retirement, this move should be downright terrifying.

What to Do About Your Retirement Benefits

Think about it. When you are still in your prime working years, a sudden increase in the cost of your health insurance is inconvenient but manageable: You still have a regular salary coming in, and you can make adjustments to your other living expenses or to your savings rate to balance the books.

All of this flexibility goes out the window once you start retirement. Unless you are wealthy (and even if you are wealthy), matching your expenses and liabilities to your income becomes critical. Your income is generally fixed with Social Security, bond interest and stock dividends, annuity payments or, if you’re lucky, a pension.

When you were working, you’d generally get a salary boost every couple of years to cover any increased living expenses. In retirement, that’s just not the case. If you suddenly have an increase in expenses that outstrip your current income, you run the very real risk of burning through your savings and being left flat broke.

I’m not saying that Kraft Heinz is wrong for shifting the risk of paying for retirement benefits to its retirees. I’ve often made the argument that tying health insurance to employment makes little sense, and it is a historical quirk of the tax code and of the wage caps that were in place during World War II. By tying health and retirement benefits to employment, you raise the cost of starting a new business and generally make it harder to switch jobs.

But I digress. It really doesn’t matter if it’s right or wrong. The fact is, it’s happening; and if your retirement plan depends on your ex-employer continuing to pay for your benefits, you might need to rethink a few things.

My advice? Don’t depend on anyone but yourself. Assume that employer or ex-employer will throw you to the wolves.

As a practical action plan, I recommend the following:

  1. Sit down and do a thorough assessment of your retirement income sources, including social security, any annuities and pensions you might have and your investment portfolio. Use very modest assumptions on the investment portfolio because there is no guarantee that bond or CD yields will be any higher than they are today.
  2. Take the dollar figure from No. 1 and slash it by 25% for good measure. This gives you a modest margin of safety in the event that any of your income sources are reduced.
  3. Do a realistic budget of your retirement expenses, including medical costs not covered by Medicare. Take your estimate of medical costs and insurance costs and double them.

If your reduced income estimate doesn’t cover your expanded expense estimate, then you might want to make some lifestyle changes.

That’s not fun.

But the earlier you make the adjustment, the less likely you are to have to make more drastic cuts later.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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