Heavyweight boxing champion Muhammad Ali was famous for saying "If the left hand doesn't get you - the right hand will" as one of the many ways of describing his boxing prowess. The same can be said about two challenging forces that exist during your retirement that are important to keep your guard up against. They are the impact of Inflation and the costs of Long Term Care. The good news is with proper planning before you get into the ring with retirement; you can build a proper defense against these two opposing forces of a comfortable retirement.
First off let me properly define the risk inflation poses. Inflation is defined as: a general increase in prices and fall in the purchasing value of money
In plain English the risk Inflation poses is that "over time things are going to cost more."
For example using an average rate of 3% inflation; means your living expenses may nearly double over a twenty year period. That is retirement's left hand, and it's a sneaky one. Its very gradual, before you realize it if you don't plan and prepare; your expenses will creep up on you and your income won't keep up in retirement.
How do you guard against Inflation?
Besides maintaining good spending habits during retirement; your investment strategy before and during retirement will play a critical role on how you manage to stay ahead of inflation. Therefore one of the major decisions that you'll need to continually make throughout retirement is the level of risk you are taking in your retirement investment portfolio. Invest too conservatively and your portfolio may not have enough "horsepower" to stay ahead of inflation. Invest too aggressively; when volatility hits it may cause you to abandon your investment strategy because of the large swings and that won't help.
Your Asset Allocation is going to be the main driver of the level of risk you take in your portfolio.
Asset allocation is an approach to manage investment risk by diversifying a portfolio among major asset classes, such as stocks, bonds, and cash alternatives. Stocks, bonds, and cash alternatives have different levels of risk and potential return. Over any period of time, one asset class may be increasing in value while another may be falling. Both asset allocation and diversification are approaches to help manage investment risk. They do not guarantee against investment loss.
One landmark study showed that up to 91.5% of the performance of an average portfolio is determined by how the assets within that portfolio are allocated between different investment classes. Only 8.5% has to do with the specific securities chosen. Past performance does not guarantee future results.
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.
What does this all mean for you?
That at the end of the day how much you have in stocks, bonds and cash is going to play a very large role in how well your investment portfolio can stand the winds of time throughout your retirement. If its been awhile since you kicked the tires and looked under the hood on your investments; its worth it to make the time to have a portfolio review done.
LONG TERM CARE
The chances are high you most likely you will live longer than your parents. Medical science is getting good at keeping us alive a very long time. What that also means is more and more people are expected to reach an age where they are likely to need some type of assistance.
The U.S. Department of Health and Human Services reports that almost 70% of people over age 65 are expected to need long-term-care services at some point in their lives.
While it’s difficult to predict what type of care any one person might need or how long he or she will need it, statistics reveal that the average person needing long-term care will need it for about three years. Women are averaging longer, at 3.7 years to men’s 2.2 years. And 20% of us will need care for more than five years.
How Can You Guard Yourself from the Overwhelming Cost of Long Term Care?
There are many options, however your primary choice is between two options: self insure or purchase long-term-care insurance. If you already have a Long Term Care policy, you've made a smart choice. If you have had your policy more than 2 years its unlikely you will find a better deal than you have, that's how fast the rates change as you age. If the thought ever crosses your mind to give it up to save some money, don't do it.
If you don't have a Long Term Care policy at this time, you really should give it a good hard look. It's worth running some numbers, understanding how it works and giving it some serious consideration. The cost of Long Term Care is the wild card that exists in your Financial Plan, guard against it by having an answer to the question: What are you going to do when your health changes?
If you feel you need to get some of the basics down about Long Term Care Insurance, download our handout: What to Look for in a Long Term Care Policy
Sometimes the best offense is a good defense; having a plan for how to address Inflation and the costs of Long Term Care in your retirement plans will give you more peace of mind to enjoy the retirement you've been preparing for; and help keep you from ending up against the ropes!