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Business // Thinking Smart
David S. Chang

U.S. Retirement Crisis Part III

The last two weeks we covered the U.S. retirement crisis and how to deal with it. Here are some more strategies to help ensure that your assets last as long as you need them to.

Fight The Effects Of Inflation. Inflation is known as the silent thief, since it eats away at the purchasing power of your money over time. It hits retirees’ disproportionately hard, since prices rise for everything while on a fixed income. If you need $50,000 a year for retirement and inflation is 3 percent, in 20 years you will need more than $132,000 to match it! Having a portfolio that’s positioned to help fight inflation is critical. Traditionally, those approaching retirement gradually reduced their exposure to risk and favored more conservative investments.

However, a too-conservative investment strategy can be as dangerous as a too-aggressive one, since it exposes your portfolio to inflation. This, in turn, may limit your assets’ ability to grow over time, increasing the risk that you’ll outlive your assets. A well-diversified portfolio that includes an appropriate mix of stocks, bonds and alternative investments according to your personal needs and goals may help you seek the growth you need in a way that lets you sleep better at night.

Catherine Nakamura with WealthBridge Inc. states, “Before making any investment decisions, it’s important to understand how factors such as your own personal financial circumstances, risk tolerance and time horizon affect your choices. Make sure you develop an investing strategy that’s right for your needs, goals and financial situation.”

Plan For Rising Health Care Costs. Longer life spans, rising medical costs, declining medical coverage and funding shortfalls for Medicare and Medicaid mean retirees face a serious challenge. According to a Fidelity report, a 65-year-old couple retiring in 2013 will need an estimated $220,000 in savings just to cover health care costs during their retirement. Some estimates put health care inflation at 6 percent a year and, if future trends continue, health care will be retirees’ second-largest expense after housing. To plan for your health care expenses, consider the following strategies:

* Earmark a portion of your retirement savings specifically for health care expenses. Take advantage of tax-favored vehicles such as Health Savings Accounts.

* Understand your health insurance options after retirement. While most retiring workers will lose their employer-sponsored coverage, some firms still offer retirement health care coverage.

* Understand how Medicare fits into your health coverage.

* Be a smart health care shopper. When visiting a health care provider, be prepared with information about existing conditions and any symptoms you are experiencing, ask questions about a diagnosis and prescribed medications to be sure you understand all alternatives and outcomes, and know what you’re paying for so that you fully understand your out-of-pocket costs for any treatment plans.

The average 65-year-old can expect to live 20 years or more in retirement. Living a long life has its considerable benefits, but it can create uncertainty and stress around how much money retirees will need to live comfortably for the rest of their lives. Out of fear of financial ruin, many retirees unnecessarily adopt frugal lifestyles that cause them to miss out on the best parts of retirement. Others miscalculate the true cost of retirement and over-spend, depleting their savings too soon. The issues we’ve presented in this series are complex, and it’s critical to make the right decisions before and during retirement.

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