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Planning for a Long Retirement
By David Chazin
Americans are living longer than ever, thanks to advances in health care, improved diets and better exercise. A 65-year-old today can reasonably expect to live another 15 or 20 years; among retired couples, there is a 50 percent chance one spouse will live past 90, according to the Society of Actuaries.
This is great news of course. But, it also presents you with a significant financial challenge: making sure your money lasts as long as you do. The possibility of running out of money is one of the biggest risks many Chevron retirees will face in the years ahead. The challenge: If you are close to retirement, it’s more important than ever to think about how to make your money last by addressing some key issues. For example:
Your spending habits
Don’t assume that your expenses will decline significantly once you leave Chevron. The old rule of thumb that you’ll only need about 70 percent of your pre-retirement income no longer makes sense for most of us. Retirees today and in the future are likely to be much more active than previous generations and will pursue lifestyles that require more money. True, some expenses may go down; for instance, you may downgrade to a smaller home. But others – such as travel, new hobbies and prescriptions – will almost certainly increase.
Your monthly income
For most Chevron employees, one potential source of retirement income is the CRP. Be sure to keep in mind that your CRP is not designed to keep pace with inflation. So as the years go by, your purchasing power will not hold in comparison to when you first embark on retirement. For that reason, many Chevron employees elect to take the CRP as a lump sum.
To supplement your pension, you can make monthly withdrawals from your ESIP. The amount of money you draw from your portfolio each year will have a big impact on whether or not your savings can go the distance. In the past, retirees often could safely withdraw 8 percent a year or more from their portfolios to cover living expenses. That’s not often the case anymore. Withdrawing more than 5 percent a year (adjusted for inflation) can significantly boost the risk that you may run out of money during retirement.
A longer retirement gives inflation more time to erode your purchasing power. Conventional wisdom is to become less aggressive with your investments as you near retirement from Chevron. The problem is that bonds and other fixed-income investments may not keep up with inflation. This means you may want to start your post-career life with a healthier allocation in growth-oriented investments such as stocks. Stocks have had a better track record outpacing inflation than other forms of securities, although they also carry greater risk and volatility, especially if your portfolio is heavily concentrated in Chevron stocks.
Your health care costs
The good news is that Chevron pays a portion of retiree’s health care premiums, though the exact portion varies based on the number of “points” you have. However, the retiree’s portion will likely increase. As health care costs rise, so will the percent you pay.
Also, an extended retirement may mean a greater need for specialized medical care down the road – so your plan also should set aside some assets to pay for long-term care. Care in an assisted living unit costs $2,968 a month on average, according to AARP* – an amount that can quickly deplete your ESIP and/or CRP. That makes it imperative to plan for unforeseen medical and health care problems before they occur.
If you review your situation and discover that you’re not as well prepared as you’d hoped, don’t panic. There are plenty of smart moves you can make to get on track. As a Chevron employee you might consider looking for ways to build up your retirement savings – for example, by saving more in your ESIP or investing any bonus (like your CIP) or inheritance you receive.
Another alternative is to join the growing number of Americans who are choosing to delay retirement or work part-time in retirement to generate additional income. In short, Chevron employees have options.
The key is to start planning now. By giving yourself as much time as you can to implement a comprehensive financial plan – and to review it along the way – you’ll increase your chances of achieving a comfortable and secure retirement. But since your situation is likely to change over the years, you should meet with your financial planner periodically to discuss your financial plan, how it is performing and if changes have occurred that could affect your plan.
I’d be happy to sit down with you and discuss ways to make sure your long retirement is a comfortable one. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with an advisor has helped them.
Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website at www.insight2wealth.com.
* “What Does Long-Term Care Cost? Who Pays?” (www.aarp.org/families/caregiving/caring_help/what_does_long_term_care_cost.html), accessed April 2009.
David Chazin, Insight Wealth Strategies, and Lincoln Financial Advisors Corp. are not affiliated with Chevron.