Top Risks To Your Retirement
1. Inflation
There’s no doubt about it: Inflation is a big risk for would-be retirees and current retirees. From 1980 to 2007, the annual inflation in the U.S. for all goods and services ranged from 1.1% to 8.9%, but averaged 3.5%, according to SOA. That means an item that cost $1 in 1980 would cost $2.82 in 2007.But for retirees, the rate of inflation can be even worse - especially for expenditures that represent a big and growing portion of their budget.
Take health care expenses, which tend to rise much more rapidly than general inflation. The cost of medical care has risen nearly four-fold in the 26 years since December 1982, according to the Bureau of Labor Statistics’ little-known Consumer Price Index-Experimental (CPI-E) that tracks the rate of inflation for Americans 62 and older. The CPI-E was first introduced in 1982.
Health care that cost $100 in 1983 cost $387 in April 2008, according to the CPI-E. That might not be so bad if health-care expenses as a percentage of a retiree’s budget remained the same over the course of a 20-year retirement. But health care represents about 5% of expenditures before retirement, 10% during the first half of retirement (ages 65 to 74) and 15% during second half of retirement (ages 75 and older), according to some studies.
That means health care would not just cost $387, representing 10% of expenses, but it might cost $580, representing inflation and 15% of expenses, given its cost as a percentage of expenditures. Viewed another way, increases in Medicare Part B premiums are far greater than benefit increases in Social Security, according to SOA. And Social Security is the only inflation-indexed benefit that most retirees have.
So what can be done to manage the risk of inflation? According to the SOA, retirees and would-be retirees should consider investing in equities, a home and other assets, such as Treasury Inflation-Protected Securities (TIPS) and annuity products with a cost-of-living adjustment. In addition, the SOA recommends would-be retirees “stage a semi-retirement to delay tapping retirement assets.”
2. Outliving one’s assets
For today’s 65-year-olds, average life expectancy for American men and women is 17 and 20 years, respectively, says the SOA. But 30% of all women and 20% of all men age 65 can expect to reach 90 years old, making retirement a 25-year affair.To be sure, it’s hard to predict whether one will be among those who live to 90 or among those who die before 70. But there are ways to manage the risk of outliving one’s assets. The SOA recommends strategies that preserve principal, including investing in joint-and-survivor annuities and deferred annuities that commence at high ages, such as 75 or 80. “Longevity remains a key risk, and the under-appreciation of longevity risk continues to be important,” the SOA said in its report.
A report worth reading on the subject is “Longevity: The Underlying Driver of Retirement Risk.” See the report (PDF).
Also of interest: A number of research papers available from the “Living to 100: Survival to Advanced Ages” symposium. See the Web site.
Subscribe to my RSS feed! Thanks for visiting!
