At no time in the history of mankind has the general populace had a chance of experiencing a 30-year retirement. But, with all of the advantages of the Western world, we now can look forward to spending more time doing less than our forefathers ever dreamed. That means we have to plan differently than our forefathers too. We need to shift our focus from saving to ensuring income that won’t run out. Most importantly, we need to plan for retirement conservatively. Our money has to last a very long time.
One of the main challenges when planning for longevity is the unpredictability of the market. Some statisticians estimate that the average 90-year old retiree will have lived through at least three recessions during retirement. Was your retirement nest-egg hard-hit by the last one? Then you know how significantly market losses can affect your long range plans – and you’ve got at least three more to go.
The next challenge is inflation. While a recession can hit hard and fast (if you aren’t properly diversified), inflation is a slow drain that will add up after two or three decades. You might think that you’ve guaranteed your income with products that offer fixed interest rates, but understand that although the number remains the same, the purchasing power does not. There are also products like Treasury inflation-protected securities (in which payments rise if inflation rises), but they only keep you even with inflation – they don’t put you ahead. Inflation protected annuities are another option, since they provide a steady stream of income that adjusts with cost of living, but annuities without that feature start out paying around 50 percent more. As with every part of your retirement plan, it’s a judgment call you and your retirement advisor have to make in the context of your entire financial picture.
Of course, the final challenge is planning for health care, because while most people are living longer, it’s now guarantee that you’ll live healthier. No one knows what will happen with health care in 30 years, but current projections are causing financial advisors to urge pre-retirees to save more for healthcare than ever before.
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