In my last post I wrote about one method to protect retirement portfolios from the long term impact of market volatility, an often feared retirement risk. However, there are other sometimes forgotten risks that can be just as devastating to a secure retirement. Some of those are discussed below.
Longevity Risk: Back when Social Security began, the average person lived to age 61. That average has now increased to age 78. Once you make it to age 65, you have a 50% chance of reaching age 85 and a 25% chance of living to age 92. Therefore, it is critical that every healthy retiree plan for a long life expectancy, as the alternatives are not acceptable to most.
Inflation: The above described long life expectancy statistics makes a retiree particularly vulnerable to the impact of inflation. Even a relatively benign inflation rate of 3% will cause you to lose nearly half of your purchasing power over a 20 year period. A well prepared investment portfolio will include sufficient growth assets and other “tools” designed to grow purchasing power sufficient to keep up with inflation over time.
Health Care: It is no secret that health care costs have and will continue to increase rapidly. It has been estimated that the average retiree will need over $200,000 of financial resources just to cover these costs. Long term success will require careful consideration regarding the timing of your retirement, plus the judicious use of tools like “medigap” insurance policies, healthcare savings accounts and others to cover the health care costs that Medicare does not.
Long Term Care Risk: It is estimated that 40% of those over 65 will need some form of long term care during their lives. This is a big concern when the average annual cost of a nursing home is in excess of $75,000 and is not covered by Medicare. Those without quality long term care insurance will be forced to pay these costs with their retirement assets. Medicaid will begin to help after your assets have been primarily depleted, but probably will not pay for the cost of your first choice facility.
Taxes: Failing to manage taxes during retirement can have a significant adverse impact on the overall success of a retirement plan. Because each form of account (trust, IRA, health savings, etc.) has different tax characteristics, properly managing them for taxes is imperative. How and when income is taken, as well as the investments utilized within each account, will determine your overall level of taxation and each dollar spent on taxes is one less available to meet needs.
Each retiree’s circumstances will determine the proper approach for addressing the above risks and solutions are therefore beyond the scope of this blog post. However, recognizing that they exist is often the most important step in conquering them. We would by happy to help you think more comprehensively about them as you begin to prepare for your retirement.