common factors affecting retirement income
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Can I retire and not run out of money? A very crucial question which should not be answered without doing a retirement plan. Just about 6 years ago, people earn 5% or more on a 1 year CD, now they pay roughly 0.15%. If you want to know if you are able to retire and not run out of money, call me.TRANSCRIPT
Dolf Dunn Wealth Management, LLCDolf Dunn, CPA/PFS,CFP®,CPWA®,CDFA
Private Wealth Manager11330 Vanstory Drive
Suite 101Huntersville, NC 28078
Common Factors Affecting Retirement Income
February 18, 2014
When it comes to planning for your retirementincome, it's easy to overlook some of the commonfactors that can affect how much you'll have availableto spend. If you don't consider how your retirementincome can be impacted by investment risk, inflationrisk, catastrophic illness or long-term care, and taxes,you may not be able to enjoy the retirement youenvision.
Investment riskDifferent types of investments carry with themdifferent risks. Sound retirement income planninginvolves understanding these risks and how they caninfluence your available income in retirement.
Investment or market risk is the risk that fluctuationsin the securities market may result in the reductionand/or depletion of the value of your retirementsavings. If you need to withdraw from yourinvestments to supplement your retirement income,two important factors in determining how long yourinvestments will last are the amount of thewithdrawals you take and the growth and/or earningsyour investments experience. You might base theanticipated rate of return of your investments on thepresumption that market fluctuations will average outover time, and estimate how long your savings willlast based on an anticipated, average rate of return.
Unfortunately, the market doesn't always generatepositive returns. Sometimes there are periods lastingfor a few years or longer when the market providesnegative returns. During these periods, constantwithdrawals from your savings combined withprolonged negative market returns can result in thedepletion of your savings far sooner than planned.
Reinvestment risk is the risk that proceeds availablefor reinvestment must be reinvested at an interestrate that's lower than the rate of the instrument thatgenerated the proceeds. This could mean that youhave to reinvest at a lower rate of return, or take onadditional risk to achieve the same level of return.This type of risk is often associated with fixed interestsavings instruments such as bonds or bank
certificates of deposit. When the instrument matures,comparable instruments may not be paying the samereturn or a better return as the matured investment.
Interest rate risk occurs when interest rates rise andthe prices of some existing investments drop. Forexample, during periods of rising interest rates, newerbond issues will likely yield higher coupon rates thanolder bonds issued during periods of lower interestrates, thus decreasing the market value of the olderbonds. You also might see the market value of somestocks and mutual funds drop due to interest ratehikes because some investors will shift their moneyfrom these stocks and mutual funds to lower-risk fixedinvestments paying higher interest rates compared toprior years.
Inflation riskInflation is the risk that the purchasing power of adollar will decline over time, due to the rising cost ofgoods and services. If inflation runs at its historicallong term average of about 3%, the purchasing powerof a given sum of money will be cut in half in 23years. If it jumps to 4%, the purchasing power is cut inhalf in 18 years.
A simple example illustrates the impact of inflation onretirement income. Assuming a consistent annualinflation rate of 3%, and excluding taxes andinvestment returns in general, if $50,000 satisfiesyour retirement income needs this year, you'll need$51,500 of income next year to meet the sameincome needs. In 10 years, you'll need about $67,195to equal the purchasing power of $50,000 this year.Therefore, to outpace inflation, you should try to havesome strategy in place that allows your incomestream to grow throughout retirement.
(The following hypothetical example is for illustrativepurposes only and assumes a 3% annual rate ofinflation without considering taxes. It does not reflectthe performance of any particular investment.)
If you recently retiredfrom a job that providedhealth insurance, youmay not fully appreciatehow much health carereally costs.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for anyindividual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performancereferenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with aqualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC
Equivalent Purchasing Power of $50,000 at 3%Inflation
Long-term care expensesLong-term care may be needed when physical ormental disabilities impair your capacity to performeveryday basic tasks. As life expectancies increase,so does the potential need for long-term care.
Paying for long-term care can have a significantimpact on retirement income and savings, especiallyfor the healthy spouse. While not everyone needslong-term care during their lives, ignoring thepossibility of such care and failing to plan for it canleave you or your spouse with little or no income orsavings if such care is needed. Even if you decide tobuy long-term care insurance, don't forget to factorthe premium cost into your retirement income needs.
The costs of catastrophic careAs the number of employers providing retirementhealth-care benefits dwindles and the cost of medicalcare continues to spiral upward, planning forcatastrophic health-care costs in retirement isbecoming more important. If you recently retired froma job that provided health insurance, you may not fullyappreciate how much health care really costs.
Despite the availability of Medicare coverage, you'lllikely have to pay for additional health-relatedexpenses out-of-pocket. You may have to pay therising premium costs of Medicare optional Part Bcoverage (which helps pay for outpatient services)and/or Part D prescription drug coverage. You mayalso want to buy supplemental Medigap insurance,
which is used to pay Medicare deductibles andco-payments and to provide protection againstcatastrophic expenses that either exceed Medicarebenefits or are not covered by Medicare at all.Otherwise, you may need to cover Medicaredeductibles, co-payments, and other costsout-of-pocket.
TaxesThe effect of taxes on your retirement savings andincome is an often overlooked but significant aspectof retirement income planning. Taxes can eat intoyour income, significantly reducing the amount youhave available to spend in retirement.
It's important to understand how your investments aretaxed. Some income, like interest, is taxed at ordinaryincome tax rates. Other income, like long-term capitalgains and qualifying dividends, currently benefit fromspecial--generally lower--maximum tax rates. Somespecific investments, like certain municipal bonds,generate income that is exempt from federal incometax altogether. You should understand how theincome generated by your investments is taxed, sothat you can factor the tax into your overall projection.
Taxes can impact your available retirement income,especially if a significant portion of your savingsand/or income comes from tax-qualified accountssuch as pensions, 401(k)s, and traditional IRAs, sincemost, if not all, of the income from these accounts issubject to income taxes. Understanding the taxconsequences of these investments is vital whenmaking retirement income projections.
Have you planned for these factors?When planning for your retirement, consider thesecommon factors that can affect your income andsavings. While many of these same issues can affectyour income during your working years, you may notnotice their influence because you're not dependingon your savings as a major source of income.However, investment risk, inflation, taxes, andhealth-related expenses can greatly affect yourretirement income.
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