July 24, 2016

Be aware of challenges to managing retirement income

Reed Wilcox

Reed Wilcox

When you retire, will your cost of living decline? Some of your expenses may indeed drop, but others won’t. Plus, you may have some new ones to consider. So, all in all, it’s a good idea to think about ways to boost your retirement savings now, before you’re retired. And once you do retire, you’ll need to be adept at managing your income. But whether saving today or planning for tomorrow, you should familiarize yourself with the key financial challenges you will face during your retirement years.

Specifically, consider these areas:

Longevity

Obviously, the longer your retirement lasts, the more money you’ll need. And you could be retired for quite some time. A 65-year-old man, on average, is expected to live another 17.9 years, while a 65-year-old woman can anticipate another 20.5 years, according to the National Center for Health Statistics. With this type of potential longevity in mind, you’ll want to contribute as much as you can afford to your retirement plans, such as your IRA and 401(k), while you’re working. Then, when you are retired and start tapping into your investment portfolio, you will need to create a sustainable withdrawal rate — one that doesn’t push you into the “danger zone” of possibly outliving your resources.

Health care

Once you enter your retirement years, your health care costs are all but certain to rise, even with Medicare. In fact, the average annual out-of-pocket health care cost for a household between 65 and 74 years old is $4,383 — about 11 percent of total household spending, according to the Employee Benefit Research Institute. And these costs rise substantially for those over 74. To help cope with these costs, you’ll need a reasonable amount of liquidity in your portfolio.

Long-term care

You may never need to stay in a nursing home or receive services from a home-health-care worker. But you are taking somewhat of a gamble if you don’t prepare for these long-term-care costs — because they are high. In fact, the annual average cost for a private room in a nursing home is more than $92,000, according to the 2016 Cost of Care Survey produced by Genworth, a financial services company. Medicare typically pays very little of these expenses, but a financial professional can help you find an appropriate way of coping with these types of costs.

Inflation

We’ve had low inflation the past several years, but it hasn’t gone away entirely, and it won’t disappear when you’re retired, either. Even a mild rate of inflation can, over time, seriously erode your purchasing power. To combat the effects of inflation, you’ll need to own at least some growth-oriented investments.

Market volatility

The financial markets will bounce up and down during your retirement years, just as they did when you were working. The big difference? You have less time to recover — and you don’t want to withdraw from your investments when their price is down. However, you can help avoid this necessity by maintaining enough income-producing vehicles in your portfolio; these types of investments usually fluctuate much less in value than stocks and stock-based vehicles.

By being aware of these issues, both before and during your retirement, you can prepare for them — and preparation is key to managing your income, as it is in all walks of life.

 

Reed Wilcox is a financial advisor with Edward Jones in Rutland and an avid outdoorsman. When he isn’t in the office serving clients, your best chance to find him is to head up into the mountains.

Edward Jones, its employees and financial advisors, are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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