Don’t Forget These Five Retirement Challenges

People who are approaching retirement tend to ask themselves certain questions, sometimes repeatedly:

Am I investing enough?
Am I investing aggressively enough?
Am I making the most of my tax-saving opportunities?

You can greatly increase your peace of mind concerning your retirement nest egg by following your financial advisor’s guidelines for generating income in retirement. As you plan, there are five major risks to keep in mind.

1. Longevity. Thanks to improvements in diet and medicine, we’re all living longer. Your money will have to last longer, too. While your life expectancy at age 65 is about 20 years, life expectancy is an average. Half of us will spend more than 20 years in retirement and half won’t. It is prudent to plan for more than 20 years of retirement income.

2. Rising prices. Inflation doesn’t disappear from your life after you retire. Assuming you are no longer working but want to keep your lifestyle intact, you will have to give yourself a raise from your retirement savings. Some people plan to spend less money in retirement, but that may not be the best thinking. True, you may spend less on things like housing and transportation. But health care and long-term care—services that you are likely to use quite a bit as you get older—is expensive and costs are rising by approximately 8 percent annually.

3. Medical and long-term care costs. Statistically, people tend to spend a great deal of money on health care in their later years. Total health care spending can easily rise into the six-figure range if you do not have employer-sponsored post-retirement medical insurance. And today’s employers are increasingly unlikely to provide retiree health benefits. Long-term care costs also are high and rising. According to AARP, nursing home care costs approximately $75,000 a year, on average. To help mitigate these risks, your retirement income planning might include life insurance or long-term care insurance products.

4. Taxes. During the past 50 years, tax rates have been at current levels or lower only 10 percent of the time. The current economic and political climate is increasing the odds of tax rates reverting to pre-1980s levels. This means the tax savings that investors enjoyed during their working years could be more than offset by higher taxes in retirement.

5. Investment risk. Finally, we can plan for the impact of the stock and bond markets. It’s essential—but not easy—to find the right balance between bonds that preserve capital and investing aggressively enough to ensure that your portfolio growth keeps up with inflation. Otherwise, your assets and income might not support your standard of living as inflation erodes your purchasing power. In retirement, stocks should continue to be a significant part of your portfolio. The stock market’s rate of return and volatility may help you generate a sustainable income over a long period of time.

The only thing that’s a given about the retirement landscape is that it will keep changing. It’s critical for investors to prepare for certain (and uncertain!) risks. A thoughtful income strategy and comprehensive financial plan can help you address the five key challenges while working toward the retirement lifestyle you desire.

Wealth Enhancement Group

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