One of lifeís guarantees is that there will always be surprises. Especially when it comes to planning for retirement.
Last year we experienced several sudden downturns of the market. Meanwhile, interest rates have imperceptively crept upward, thrashing bonds. One way to mitigate this is to be sure you have enough liquid assets in emergency reserves.
Be sure that the benefits report from your employer shows the payout assumption for the joint-and-survivor option Ė most people opt for this choice. Use this number in your planning. This option can reduce your pension amount by as much as 20-25% from the single life option. Youíll need to make up this amount elsewhere in your portfolio.
Lately, inflation has been low historically, but this wonít always be the case. Over 25 to 30 year in retirement, inflation will erode your purchasing power. Prices can increase for groceries, gas, telephone service, and services such as plumbers and other repairman. If your pension doesnít increase with inflation, itís purchasing power can be cut almost in half during your retirement.
Social Security payments do increase with inflation, but not enough. Itís based on a price index that isnít the best measure of the costs seniors face. Also, medical and prescription costs increase with age and rise faster than inflation.
Taxes are paid on distributions from some retirement vehicles. Also, your tax rate may not drop after you retire. And letís not forget the so-called Ďhidden taxesí, and rising property taxes, and taxes on your Social Security benefits, and taxes when you sell stocks and mutual funds.
|Many retirement plans from canned
retirement software products donít include these surprises in their assumptions.
And how about these other surprises?:
How can you lessen the effect of the inevitable surprises? Build in a cushion in all your expense projections. Then add a little more. Make sure your portfolio is properly diversified for both growth and income. Base your inflation and equity growth assumptions on historical averages, not current rates. Donít over allocate to any market sector or industry. Assume a worst case scenario of a market drop lasting two to two and one half years. Use after tax projections of your cash flow. Base your retirement cash flow on using a percentage of the portfolio total each year, not on a fixed dollar amount. Monitor your budget and portfolio.
Securities offered through Goldis Financial Group, Inc. 100 Quentin Roosevelt Blvd. Garden City, NY 11530 (516-357-8900), member NASD & SIPC
2359 Salisbury Road Westbury, NY 11590