5 Tips to Ensure Retirement Money Last for Life-long
Jun 17th, 2008 by Kaushik Adhikary
Here are 5 tips to ensure your retirement money lasts till the end.
These challenges are-
- Potential for outliving one’s assets,
- Uncertainty of getting future level of social security benefits;
- Damage to long-term financial security;
- Threat of rising living costs and
- Threat of increasing health-care costs.
Understanding each of these challenges and their solution can bring back your confidence. Standard & Poor’s suggests you consider these five risks to your retirement income.
Points to Remember:
o Today’s retirees have to face several threats in enjoying a financially comfortable retirement. Some of these include the potential for outliving their assets and the erosive effects of inflation on future income.
o 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.
o Demographic trends are likely to put added stress on government-run programs, such as Social Security and Medicare, which help retirees to manage their budgets.
o The goal of retirement income planning is to create a sustainable, predictable stream of income that also has the potential to increase over time.
Analyzing the Issues:
Longevity: Most people expect to live a long life and enjoy the to the fullest. They want to ensure their longevity to be supported by an adequate financial cushion.
Now that the average lifespan of people are steadily lengthening due to the advancement in medical science and sanitation. Hence the chance of premature depleting of one’s retirement assets has become a matter of great concern. This assumption is not a certain, but very likely to happen.
Inflation varies over time, as well as from region to region that affect one’s personal lifestyle. With so many ups and downs, US consumer inflation has averaged around 4% over the 50 years ended December 31, 2006. Different countries have different set of consumer inflations.
If inflation of the US were to continue increasing at a 4% annual rate, a dollar would be worth $0.44 in just 20 years. Just think a minute about it. Conversely, the price of a car that costs you $10,000 today could be available at more than $22500 within two decades. Your $100,000 savings could be reduced to mere $44,000 in just 20 years.
If a retiree stops funding his living expenses from his wages, inflation affects retirement planning in two ways- It would increase the future cost of goods and services, and it potentially erodes the value of assets set aside to meet those costs, if 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, primarily due to three reasons-
Health-care expenses are increasing at a faster pace than the overall inflation rate. Perhaps that’s why many employers have started curtailing medical coverage for retired employees. Additionally, the nation’s ageing population has to depend heavily on Medicare, the federal medical insurance program for those aged 65 and older which in turn forcing Medicare recipients to contribute more toward their benefits and to purchase supplemental insurance policies.
Because of this 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 towards health insurance and Medicare premiums, as well as out of pocket medical bills, according to a Money magazine report.
Excess Withdrawals:
Now, deciding on how much money can safely be withdrawn each year from a retirement nest egg should take into consideration all the risks mentioned above. Retirees also have to consider the fluctuating returns on their personal savings and investments that likely to produce over time and the overall health of the financial markets and the economy during their withdrawal period.
Addressing the Risks:
While the level of risks as discussed above are common to majority of 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 instance, if you are in good health and intend to retire in your mid sixties, you may want to plan for a retirement lasting for 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’t have to go it alone.
