Dealing With Retirement Risk
Protect your retirement from inflation, rising health care costs
NAPLES, Fla., Nov. 28, 2012 /PRNewswire/ -- For many Americans, the definition of retirement success is simple: It means having enough money to live the type of retirement they want. Today, creating financial security for the future is likely to fall largely on your own shoulders. You can still pursue the retirement of your dreams, but you'll need to plan for it and make wise choices about your money.
"The planning process can be more effective if you take into account risks that have the potential to derail your future financial security," said Jack Kuhn, CFP, Managing Director – Florida West Coast, BMO Private Bank. "Some possible risks everyone should consider when planning for retirement include inflation, soaring health care costs and potential need for long-term care."
Don't ignore inflation: A dollar today will be worth less at retirement because of the impact of inflation on the cost of everyday goods and services. Even a relatively modest 3 percent rise in prices means $100 worth of groceries today may cost $200 in 24 years. If your objective is for your retirement savings to at least keep pace with inflation, it will likely require broader diversification into investments beyond cash equivalents. Just how aggressive a person can appropriately invest involves a number of considerations including suitability, risk profile and time horizon or how long you intend to be invested.
If seeking to outpace inflation, it might be appropriate to consider placing a portion of your portfolio in diversified investments that are to some degree growth-oriented. Notably, increased potential for higher returns that provide 'growth' of assets also comes with increased risk and volatility. However, if you have a longer time horizon for your investment, accepting some risk and volatility may prove worthwhile to help protect against the effects of inflation, which carries an uncertain degree of risk itself.
If you cannot stomach the idea of riding the ups and downs of the financial markets in pursuit of long-term gain, annuities may be worth considering. Annuities are essentially investments that have an insurance component, but there are various types of annuities, each offering different features. For example, an annuity may offer a cost-of-living adjustment that can be used as a means to help protect your retirement savings against the impact of inflation over time.
Take the temperature of health care costs: Longer life spans, skyrocketing medical costs and decreasing health care coverage by private employers make managing medical expenses a significant concern for retirees. New health care provisions set to go into effect in 2014 may reduce premiums somewhat, but if medical costs continue to trend higher, it is projected that half of retirees in 2030 could spend more than one-quarter of their income on medical bills and insurance premiums.* To help pay some of the services not covered by Medicare, you might consider purchasing supplemental health insurance and boosting the savings you have earmarked for medical expenses in retirement.
Think long term: One of the greatest risks to retirement planning is the cost of long-term care. That's because one-third of people will need some type of long-term care during their lives, according to the National Association of Health Underwriters. Medicare may help, but currently, it only covers a maximum of 100 days in a nursing home. That's why it is a good idea to consider what options you have to meet potential on-term care costs. Paying out of pocket is a possibility for some with sufficient means. You may also consider disability income insurance and securing a long-term care solution to help protect your lifetime savings against the potentially devastating financial impact that a prolonged injury or illness can create. Long-term care insurance is based on age, so the earlier you purchase a policy, the lower the annual premiums may be. Other long-term care solutions are also available if you do not qualify.
"Developing a realistic financial plan to help meet your needs as you transition into and through retirement doesn't have to be overwhelming," said Kuhn. "There is a lot to look forward to in retirement, including having the time and freedom to pursue whatever activities make you happiest."
Your BMO Harris Financial Advisor can provide useful information, as well as valuable perspective, on the options for successfully creating the lifestyle you want now and for years to come. Visit www.bmoharris.com/financialadvisors for tips and guidance to help you plan for your retirement needs -- whether you are currently saving for, nearing or living in retirement.
BMO Harris Financial Advisors, Inc. is a full service brokerage and SEC-registered investment advisor, which along with BMO Harris Bank N.A., are affiliates within BMO Financial Group.
*Dratch, D. Health Care for Retirees. http://www.bankrate.com/finance/retirement/health-care-costs-a-huge-retirement-factor-1.aspx
SOURCE BMO Harris Financial Advisors
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