It is incumbent upon pre-retirees to save enough to cover their healthcare in retirement. If your health insurance plan is a high-deductible plan with access to an HSA I urge you to take advantage of this opportunity.
Salt away as much as you are allowed and if possible cover your deductibles and out-of-pocket costs from other sources while you are working.
Let the HSA grow and then use these funds to cover Medicare supplement insurance and other healthcare costs in retirement.
Plan for your long-term care needs
Very much related to the cost of healthcare in retirement is the cost of long-term care if needed. Costs will vary based upon where you live, whether you are in a facility or receive care at home and a multitude of other factors.
Long-term care insurance is one way to offset some or all of these potential costs. LTC insurance can be quite expensive and only gets more expensive the older you get. Insurance is often cited as most appropriate for those in the middle in terms of net worth.
The poor can often rely on Medicaid and the rich can usually self-fund this expense.
The right answer will depend upon what you can afford in terms of premiums and how much of your savings you are willing to spend on this cost.
The bottom line here is that you need to assume you will need long-term care at some point and have a plan to fund these costs.
No surprise, these costs are increasing and will be a contributing factor to retirement inflation in the future.
Invest in tax-advantaged investment vehicles while you are working
Utilize your employer’s 401(k) plan or similar plans such as a 403(b) or 457. Contribute to an IRA. If you are self-employed start and fund a self-employed retirement plan such as a Solo 401(k), a SEP-IRA or other plan.
Since you aren’t paying income taxes on earnings throughout the years, that typically means you’ll have a larger balance at retirement than if you were paying taxes on these investment gains throughout the years.
You’ll start out with a larger retirement base to help combat inflation’s effects. If some of this money is in a Roth IRA or Roth 401(k) withdrawals are tax-free to boot.
Minimize withdrawals especially during the early years of retirement
To counter inflation, you will need to withdraw larger and larger sums just to maintain the same purchasing power.To make sure you don’t run out of funds late in life, keep withdrawals during the early years to a minimum.
Conventional wisdom in the financial planning world says that 3%-4% can generally be withdrawn each year.
The reality is this is at best only a rule of thumb. The amount you spend in retirement will likely not be linear and will evolve over the course of your retirement.
For example travel and other aspects of an active lifestyle might be more prevalent early in your retirement. Depending upon your health, the cost of medical care might increase during the later years of retirement.
Minimizing your withdrawals from retirement accounts during the early years of retirement can help ensure that the funds you need will be there later on in retirement.
Work in retirement
For some the best way to make sure they are protected from inflation is to work a bit longer or to work at least part-time for a few years into retirement. This will add to your spendable cash flow and lower the amount you need to take from savings for a few years; both can help you combat inflation during retirement.
Be prepared for change
Things will change during the course of your retirement. You need to manage the financial aspects of your retirement. Watch your withdrawals, manage your investment allocation and monitor your spending. Be prepared for the unexpected including changes in your health.
The Bottom Line
Inflation is the worst enemy of retirees, it should be feared at least as much as any potential for investment loss. Not preparing for inflation in retirement can cause you to run out of money at a time of life when this situation is hard to rectify.
The fact that many retirees are on fixed incomes either in total or in part makes them susceptible to the ravages of inflation. Managing the impact of inflation in retirement should be a top priority for all retirees.
Managing your investments and spending to minimize the impact of inflation will go a long ways toward ensuring a financially successful retirement, as will saving and investing as much as you can during your working years.
This article was republished with permission from The Chicago Financial Planner.