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Mutual Funds - Mutual Funds.
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Posted by on June 15, 2008, 7:53 am
Five tips to make sure your retirement money lasts till the end
Five major challenges faced: Potential for outliving one=92s assets;
threat of rising living costs; impact of increasing health-care costs;
uncer-tainty about future level of social security benefits; and
damage to long-term financial security
With so much at stake when planning a retirement income stream, it
pays to take a step back and see whether your plan takes into account
the major obstacles to retirement income adequacy.
When you take this big-picture view, consider the five major
challenges most retirees face: the potential for outliving one=92s
assets; the threat of rising living costs; the impact of increasing
health-care costs; uncertainty about the future level of Social
Security benefits; and the damage to long-term financial security that
can be caused by excessive withdrawals in the early years of
retirement.
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Understanding each of these challenges can lead to more confident
preparation.
Standard & Poor=92s suggests you consider these five risks to your
retirement income, including outliving your assets and higher health-
care costs.
Points to Remember
=95 Today=92s retirees have to assess several threats to enjoying a
financially comfortable retirement. These include the potential for
outliving their assets and the corrosive effects of inflation on
future income.
=95 A sound retirement income plan needs to address specific risks, such
as longevity, rising health-care costs, and excessive withdrawal
rates, that can lead to premature depletion of assets.
=95 Demographic trends are likely to put added stress on government-run
programs, including Social Security and Medicare, which help retirees
balance their budgets.
=95 The goal of retirement income planning is to create a sustainable,
predictable stream of income that also has the potential to increase
over time.
Examining the Issues
Longevity. While most people look forward to living a long life, they
also want to make sure their longevity is supported by a comfortable
financial cushion.
As the average lifespan has steadily lengthened due to advances in
medicine and sanitation, the chance of prematurely depleting one=92s
retirement assets has become a matter of great concern.
Inflation varies over time, as well as from region to region and
according to personal lifestyle. Through many ups and downs, US
consumer inflation has averaged around 4% over the 50 years ended
December 31, 2006.
If inflation were to continue increasing at a 4% annual rate, a dollar
would be worth 44=A2 in just 20 years.
Conversely, the price of an automobile that costs $23,000 today would
rise to more than $50,000 within two decades.
For retirees who no longer fund their living expenses out of wages,
inflation affects retirement planning in two ways: It increases the
future cost of goods and services, and it potentially erodes the value
of assets set aside to meet those costs=97if those assets earn less than
the rate of inflation.
Health Care
The cost of medical care has emerged as a crucial element of
retirement planning in recent years.
That=92s primarily due to three things: Health-care expenses have
increased at a faster pace than the overall inflation rate; many
employers have reduced or eliminated medical coverage for retired
employees; and life expectancy has lengthened.
In addition, the nation=92s ageing population has placed a heavier
burden on Medicare, the federal medical insurance program for those
aged 65 and older, in turn forcing Medicare recipients to contribute
more toward their benefits and to purchase supplemental insurance
policies.
Because of the higher cost trends affecting private health insurance,
the same retiree relying on insurance coverage from a former employer
will have to allot nearly $300,000 to pay health insurance and
Medicare premiums, as well as out-of pocket medical bills, according
to a Money magazine report.
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Excess Withdrawals
The decision about how much money may be safely withdrawn each year
from a retirement nest egg should take into consideration all the
risks mentioned above.
But retirees also must consider the fluctuating returns that their
personal savings and investments are likely to produce over time, as
well as the overall health of the financial markets and the economy
during their withdrawal period.
Addressing the Risks
While the risks discussed above are common to most people, their
impact on retirement income varies from person to person.
Before you can develop a realistic plan aimed at providing a
sustainable stream of income for your retirement, you will have to
relate each risk to your situation.
For example, if you are in good health and intend to retire in your
mid sixties, you may want to plan for a retirement lasting 30 years or
longer.
And when you estimate the effects of inflation, you may decide that
after you retire you should continue to invest a portion of your
assets in investments with the potential to outpace inflation.
Developing a realistic plan to address the financial risks you face in
retirement may seem beyond your capabilities. But you don=92t have to go
it alone.
An experienced financial professional can provide useful information,
as well as valuable perspective on the options for managing
successfully what may stand in the way of your long-term financial
security.
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