Three Major Dangers in Your Retirement Plan
This week, we will see another release of Consumer Confidence Index (CCI) statistics from The Conference Board. The CCI tracks how optimistic Americans are about the state of our economy through their spending and savings habits.
In general, any reading above 100 indicates optimism. Any reading below 100 implies pessimism and caution. Since late 2007, when the global financial crisis took hold, the CCI has stayed below 100. In 2009, the index fell into the 20s. Since then, it has improved significantly, but remains stubbornly below optimistic territory. In May, the index hit 83, up slightly from April.
While some components of the U.S. economy have recovered from the financial crisis – equities markets, most notably – the CCI should remind us all that our financial planning must take into account the possibility of economic and personal downturns.
Here are three risks to think about as you talk with your advisor about your plans and goals:
1. Taxes: As a result of new federal healthcare programs and the need to reduce our public debt, many Americans find themselves today paying higher and/or new taxes. As you make your long-term financial plans, keep in mind that the tax landscape is likely to change over time. While it is impossible to predict the future tax environment, make sure that your retirement plan considers products that might lessen the tax bite. One option may be municipal bonds that generate tax-free yield.
2. Inflation: While inflation in the U.S. is currently relatively low (2.1% through the 12 months ended in May), over time rising prices can eat away at a retirement plan. If you expect to need $75,000 per year to retire comfortably, even a 3% annual inflation rate can be a dealbreaker. At that rate, in a decade you would need $100,000 per year to maintain your spending power. Keep this in mind when you plan for your rate of return on your retirement investments.
3. Healthcare: In their retirement plans, people often underestimate the impact of healthcare costs on their nest egg. In the fourth quarter of 2013, Americans’ expenses for health care jumped at an annual rate of 5.6%. When you consider that 20% of people aged 65 and older will need at least five years of long-term healthcare at some point in their lives (U.S. Department of Health and Human Services), these possible expenses can seem daunting. But planning for these potential issues is certainly preferable to having them take you by surprise.