As a retiree, you face three primary risks: inflation, health care expenses and longevity. But you can minimize these risks.
Over time, the prices of goods and services rise and inflation erodes your income's purchasing power. What can you do?
- Cut back on spending.
- Reduce debt.
- Increase savings.
- Hold some portion of savings in equity (stock) investments for your second or third decade of retirement living expenses.
Health care expenses tend to rise faster than the general rate of inflation. As a modern retiree, you are more likely to age and live longer than any generation in the past, so medical expenses likely will become a larger percentage of your budget, especially in the later years of life. What can you do about health care expenses?
- Take full advantage of preventive care programs.
- Try generic drugs when possible, because they usually cost significantly less than brand-name drugs.
- Watch for free or low-cost health clinics offered specifically for retirees. These clinics may provide flu shots, hearing tests, and other services at little or no cost.
- Earmark a portion of your income every year for future health care expenses.
Longevity risk is the possibility that you will outlive your savings. One-half of the population will pass away before age 78 — the current average life expectancy — but one-half of the population will live beyond that age, too. What can you do about longevity risk? Depending on your situation as you prepare for retirement, consider the following:
- Delay claiming Social Security benefits as long as possible — up to age 70.
- Purchase some type of guaranteed-income-for-life insurance product, like an immediate fixed annuity when in your late 60s.
- Purchase “longevity insurance,” which is a delayed annuity designed to start payments when you reach your mid-80s.
- Create a portfolio of 20- to 30-year U.S. Treasury Bonds when you reach your mid-60s; this will generate income into your 80s or 90s.
- Invest in high-quality stocks that have a strong history of paying dividends. Many advisers suggest an investment mix of 60 percent stocks and 40 percent bonds as you prepare for retirement.
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© 2012 National Endowment for Financial Education. Used with permission. All rights reserved.