Are you doing enough to protect what you’ve saved?
Here are four rules of thumb to help manage the risks to your retirement income.
Inflation can eat away at the purchasing power of your money over time. This affects your retirement income by increasing the future costs of goods and services, thereby reducing the purchasing power of your income. Even a relatively low inflation rate can have a significant impact on your purchasing power in retirement.
While many fixed income investments and retirement income sources will not keep pace with inflation, some sources, such as your Social Security benefit and UCRP pension (if eligible), may help you contend with inflation automatically through annual cost-of-living adjustments or market-related performance. Investing in inflation-fighting securities, such as the UC Treasury Inflation-Protected Securities (TIPS) Fund or the UC Short Term TIPS Fund, may make sense.
With longer life spans, medical costs that are rising faster than general inflation and possible funding shortfalls ahead for Medicare and Medicaid, managing health care costs can be a critical challenge for retirees. Estimates of what you’ll need to cover your medical expenses during retirement vary, but most sources agree that the amount can be in the six-figure range.1 And that doesn’t include long-term-care expenses. According to the U.S. Department of Health and Human Services, about 70% of those aged 65 and older will require some type of long-term care services—at home, in an assisted living facility, or in a traditional nursing home.2 The average private-pay cost of a nursing home is about $90,000 per year according to MetLife, and exceeds $100,000 in some states. Assisted-living facilities average $3,477 per month. Hourly home care agency rates average $46 for a Medicare-certified home health aide and $19 for a licensed non-Medicare-certified home health aide.3
If you are still working, explore UC’s Blue Shield Health Savings Plan, which combines a PPO plan for medical coverage with a Health Savings Account (HSA) to pay out-of-pocket expenses. An HSA offers a triple-tax advantage: you can save pretax dollars, which can grow and be withdrawn free of state and federal taxes if used for qualified medical expenses—currently or in retirement. In addition, HSA funds may be used to pay long term care insurance premiums. The cost of long term care insurance is based on age, so the earlier you purchase a policy, the lower the annual premiums.
As medical advances continue, it's quite likely that today’s healthy 65-year-olds will live well into their 80s or even 90s. This means there's a real possibility that you may need 30 or more years of retirement income.
An American man who’s reached age 65 in good health has a 50% chance of living 20 more years to age 85, and a 25% chance of living to 92. For a healthy 65-year-old woman, those odds rise to a 50% chance of living to age 88 and a one-in-four chance of living to 94. The odds that at least one member of a 65-year-old couple will live to 92 are 50%, and there’s a 25% chance at least one of them will reach age 97.4
You may be eligible to receive a UC contribution towards the monthly cost of medical and dental coverage if you elect monthly retirement income from the UC Retirement Plan and meet certain UC service credit requirements.
An investment strategy that’s too conservative can be just as dangerous as one that’s too aggressive. It exposes your portfolio to the erosive effects of inflation, limits the long-term upside potential that diversified stock investments can offer, and can diminish how long your money may last.
On the other hand, being too aggressive can mean undue risk in down or volatile markets. A strategy that seeks to keep the growth potential for your investments without too much risk may be the answer.
Get help creating an appropriate investment strategy that works for you from a Fidelity Retirement Planner. A diversified portfolio that includes a mix of stocks, bonds, and short-term investments may help you seek the growth you need without taking on more risk than you are comfortable with. Remember that diversification and asset allocation do not ensure a profit or guarantee against loss.
1 “Planning for Retirement? Don't Forget Health Care Costs,” nytimes.com, October 5, 2012.
2 U.S. Department of Health and Human Services, 2015, http://longtermcare.gov/the-basics/who-needs-care/
3 MetLife "The 2012 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs"
4 Annuity 2000 Mortality Table; Society of Actuaries. Figures assume a person is in good health.
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