In my first post I discussed the first two of five key perils I think are important to consider when you’re approaching retirement or are in retirement:
- Income Taxes – You must do careful planning and thoughtful preparation to assure you do not pay excessive income tax.
- Excessive Fee’s in your financial products or from your manager.
Now we’ll delve into the next three perils that prudent retiree’s should be aware of.
There are a multitude of risks that one faces in retirement. In this case we’re speaking of financial risk meaning exposure to loss of some or all of your income producing principal. There are many ways to measure the risk of a financial product; business risk, market risk, credit risk and more. But we all know the most important question to ask is: “am I exposed to a possible decline in my investment net worth based on the performance of the holding I own?”
This seems very elementary, but the general rule of thumb is to attempt to minimize exposure to volatility. In attempting to do this you will be seeking the appropriate balance of investments that could be considered “guaranteed” with those that are considered “nonguaranteed.”
The takeaway from understanding this peril is to clearly identify your tolerance of risk. This includes identifying the type of investments that fit your belief, your desired outcome and is age and net worth appropriate.
Inflation is a challenging animal to tackle. Inflation is the measurement of the increase in the cost of a basket of goods and services. Can you think of anything that costs more today than it did 10 years ago? Prescriptions? Food? There are certainly others. Without knowing the future, the important element of inflation planning is to understand that you must prepare for the probability that goods and services will be more expensive in the future and it will be important for you to use that as a building block for your retirement plan.
You can be very exacting in your assumptions as well. You could look at your “personal inflation” for example. Also remember some things don’t inflate, such as fixed mortgage payments, fixed insurance premiums and such.
Without a doubt, this is a very complicated planning aspect and something one must face when approaching or are in retirement. I consider healthcare an element that affects you in various phases of retirement.
The Pre-Medicare Retiree.
He or she most likely will not be eligible for Medicare and therefore will be responsible to cover the costs of healthcare insurance by other means. That may be the continuation of an employer plan, COBRA, or purchasing individual health insurance. There is also the possibility that a spouse may still have coverage and the retiree is covered under that plan.
The Medicare Eligible Retiree.
Good healthcare planning doesn’t end solely with Medicare coverage. There are varying options to address the cost of your prescription medication and multiple levels of Medicare Plans that you can choose to participate in (See this link for more information: http://www.medicare.gov/supplement-other-insurance/compare-medigap/compare-medigap.html) and outside Medicare “supplement” plans that you may want to consider.
Long Term Care Planning Mode.
Whether you are considering the highest cost of care such as skilled care in a long-term care facility; or simply assistance with activities of daily living in an assisted living facility, no matter how you slice it, this is a very expensive aspect of healthcare in a retiree’s life. How can you address these matters? You can of course self-insure. There are programs developed that help enhance your self insurance pool by using insurance products designed for that objective. There is traditional long term care coverage where you specifically pay a premium to cover the risk much like you do with homeowners or auto insurance.
Finally there is doing nothing. A plan in and of itself, but not necessarily considered the smartest. Many people are in a position where this is simply how they must address this. It doesn’t make it bad. It certainly is just an obvious outcome if one cannot afford long-term care insurance or self insurance.
The conclusion is that good planning really begins with a comfortable discussion of these key perils and a plan of action for these and other risks that people face when planning their financial future during retirement. After all, when good work is performed the finances and the risk fade into the background so that you can begin enjoying the best years of your life.