By David N. Chazin
Longer lives and better health translate into longer retirements and new concepts of what retirement should be. Many of today’s retirees view retirement as a time to shift gears but not necessarily to slow down. They keep their skills sharp by taking jobs outside the lab or starting businesses. Many choose to go back to school or pursue creative passions.
However you define retirement for yourself, the bottom line is that you want to have enough money when you leave the lab to live your life without constantly worrying that you’ll run out. It certainly pays to be prepared.
A successful retirement plan usually begins, of course, with making smart savings and investing decisions long before you contemplate retiring. But of equal or even greater importance is how you manage your money after you’ve left the lab and begin to turn to your investments to provide the income that supports your lifestyle.
Most lab employees can expect to receive a monthly pension for their years of service to the lab. In many cases however, the pension and social security income are insufficient and retirees need to draw income from their savings. To boost the chances that your savings will let you live comfortably in retirement, there are five primary areas of risk that you need to address:
1. Timing and Withdrawals:
The amount you withdraw from your UC/lab retirement accounts and other investment accounts, and when you do so are two of the main determinants of how long your portfolio will last. For example, taking large withdrawals during bear markets such as those in 1973-1974 or 2000-2002 makes it hard for a portfolio to recover and grow.
To the degree possible, you want to minimize drawing on your capital in a weak market since you’ll have less capital for the rebound. If you can keep your annual withdrawal rate smaller than your average annual return less inflation, your assets may continue to grow positively even though you’re making withdrawals.
2. Market Volatility:
Related to the first risk, you need to position your portfolio to withstand inevitable swings in the market, and the way to do this is through diversification and asset allocation – holding a combination of stocks, bonds, cash and alternative investments that matches your risk profile. Returns on these investments should be no correlated, so that when one area is down, another area is up. In retirement, you need diversification to perform a balancing act of having enough growth-oriented investments to help achieve acceptable long-term returns and bonds and other fixed income securities to provide steady income. Annuities could also make sense to provide at least a portion of your retirement income.
The good news is that you have a good chance of living to a ripe old age, but the risk here is essentially that you could outlive your assets. For a married couple who both reach age 65, there is more than a 60% chance that one of them will live to age 90 (Source: Ibbotson Associates, 2006). That means that if you retire at 60, you may need to plan for 30 years or more in retirement.
4. Taxes and Inflation:
Don’t underestimate the ability of inflation to destroy spending power. Over the past 25 years, during which inflation has been fairly tame, the Consumer Price Index (CPI) has more than doubled. If inflation accelerates to 6%, prices would double in about 12 years. Even though your UC/LLNS pension has a cost-of-living-adjustment, any inflation greater than 2% will erode your spending power.
In addition, our nation has recently gone through by far the greatest period of spending in history and is facing a massive budget deficit. Many experts expect income and capital gains tax rates to rise (perhaps significantly) in the future, which could further reduce the income you have available in retirement.
5. Health Care Costs:
These costs have traditionally run at double or triple the overall rate of inflation and are not under control. Fortunately, the lab pays a portion of many retirees’ health insurance premiums, and as long as this benefit stays in place, you may not have to worry about health care costs. However, health insurance usually does not cover long-term care costs (such as nursing home or live-in care), which can significantly eat into retirement savings. You can consider long-term care insurance as a way to help pay for some of these potential costs as you get older.
Thanks to a combination of advances in medical technology and better lifestyle choices, Americans are living longer and more active lives. Nonagenarians (people between the ages of 90-100) are becoming commonplace, and all you have to do is watch Willard Scott on the Today show to see that there’s no shortage of seniors surpassing the century mark.
You should enjoy your retirement years – however you decide to spend them. Spending some time planning today can help you enjoy financial security tomorrow. I’d be happy to sit down with you to review how you’re positioned to navigate these retirement risks, answer any financial questions you have, and discuss a strategy for your retirement and investments.
Because I work with many lab employees and retirees, I’m knowledgeable about the UCRP, UC’s retirement accounts, the options available with TCP2, the lab’s benefit offerings, plus other issues specific to lab employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my lab clients and you can ask them how working with an advisor has helped them.
Please contact us at (800) 318-7848 with specific questions or to schedule a time to meet in either our San Ramon or Livermore office (about a mile from the lab).
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