[BUBUIOC INC.] Five big risks to your retirement

[BUBUIOC INC.]

Use these rules of thumb to help protect your savings and income.

If you’re nearing or in retirement, it’s important to think about protecting what you’ve saved and help ensure your income needs are met currently and in the future. Here are five rules of thumb to keep in mind now—and throughout retirement.

1. Plan for rising health care costs

With longer life spans, medical costs that are rising faster than general inflation, declining retiree medical coverage by private employers, and possible funding shortfalls ahead for Medicare and Medicaid, managing health care costs can be a critical challenge for retirees.

A 65-year-old couple retiring in 2012 will need an estimated $240,000 to cover health care costs during their retirement.1  And that is just using average life expectancy data. Many people will live longer and have higher costs. Since 2002, estimated costs have increased by 6% a year.

That cost doesn’t include possible long-term-care (LTC) expenses. According to the U.S. Department of Health and Human Services, about 70% of those age 65 and older will require some type of LTC services—either at home, in adult day care, in an assisted living facility, or in a traditional nursing home. The average private-pay cost of a nursing home is about $90,000 per year according to MetLife, and exceeds $100,000 in some states. Assisted living facilities average $3,477 per month. Hourly home care agency rates average $46 for a Medicare-certified home health aide and $19 for a licensed non-Medicare-certified home health aide.

Consider earmarking a portion of savings for health care and purchasing long-term-care insurance. The cost is based on age, so the earlier you purchase a policy, the lower the annual premiums.

 Help budget your health care costs in retirement with our Retirement Income Planner.

2. Expect to live longer

As medical advances continue, it’s quite likely that today’s healthy 65-year-olds will live well into their 80s or even 90s. This means there’s a real possibility that you may need 30 or more years of retirement income.

An American man who’s reached age 65 in good health has a 50% chance of living 20 more years to age 85, and a 25% chance of living to 92. For a 65-year-old woman, those odds rise to a 50% chance of living to age 88 and a one-in-four chance of living to 94. The odds that at least one member of a 65-year-old couple will live to 92 are 50%, and there’s a 25% chance at least one of them will reach age 97.2

Without some thoughtful planning, you could easily outlive your savings and have to rely solely on Social Security for your income. Chances are, like many people, you don’t have a company pension to rely on—only 30% of Americans today have one.3  And with the average Social Security benefit of just over $1,230 a month, it likely won’t cover all your needs.4

Consider turning some of your retirement savings into a guaranteed stream of income by purchasing a fixed-income annuity. You can turn a portion of your retirement savings into a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.

3. Be prepared for inflation

Inflation can eat away at the purchasing power of your money over time. This affects your retirement income by increasing the future costs of goods and services, thereby reducing the purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree’s purchasing power. Our hypothetical example (below) shows that $50,000 today would be worth only $30,477 in 25 years, even with a relatively low (2%) inflation rate.

Some retirement income sources, such as Social Security, some pensions, and variable annuities can help you keep pace with inflation automatically through annual cost-of-living adjustments or market-related performance. But others, such as fixed pensions and annuities or fixed-income investments, may not.

Consider investments that invest in inflation-fighting securities. Among the choices are: growth-oriented investments (e.g.,individual stocks or stock mutual funds), Treasury Inflation-Protected Securities (TIPS), and commodities.

4. Position investments for growth

A too-conservative investment strategy can be just as dangerous as a too-aggressive one. It exposes your portfolio to the erosive effects of inflation and limits the long-term upside potential that diversified stock investments offer. On the other hand, being too aggressive can mean undue risk in down or volatile markets. It would help to have a strategy that seeks to keep the growth potential for your investments without too much risk.

The sample target asset mixes below show some asset allocation strategies that blend stocks, bonds, and short-term investments to achieve different levels of risk and return potential. A conservative mix seeks to minimize fluctuations in market values by taking an income-oriented approach with some potential for growth, and includes some stocks or stock funds because growth will still be important—particularly during one’s earlier retirement years. With retirement likely to span 30 years or so, you’ll want to find a balance between growth and preservation.

Consider creating a diversified portfolio that includes a mix of stocks, bonds, and short-term investments, according to your risk tolerance, overall financial situation, and investment time horizon. Doing so may help you seek the growth you need in a way that lets you sleep at night. Diversification and asset allocation do not ensure a profit or guarantee against a loss.

 Create an appropriate investment mix with Portfolio Review.6

5. Don’t withdraw too much from savings

Drawing down your savings too rapidly can also put your retirement plan at risk. This risk can be magnified further if a sustained market downturn—similar to the one from 2007 to 2009—occurs early in retirement. For this reason, we believe that retirees should consider using conservative withdrawal rates, particularly for any assets needed for essential expenses.

Withdrawing more than 5% of assets may increase the risk of your retirement income plan falling short. Fortunately, you have control over how much you withdraw and can adjust it based on circumstances.

Consider keeping your withdrawals as conservative as you can. Later on, if your expenses drop or your investment portfolio grows, you may be able to raise that rate.

In conclusion

After spending years building your retirement savings, switching to spending that money can be stressful. But it doesn’t have to be that way, if you can take steps leading up to and in retirement to manage these five key risks to your retirement income.

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Posted By BUBUIOC INC. to BUBUIOC INC. at 12/31/2012 08:00:00 AM