MAKING CENTS: Getting through future retirement roadblocks

If someone asked you your three greatest concerns about maintaining or improving your life style during retirement, what would they be? Think of this for a moment before you read on.

Under the category of additional food for thought, let me introduce some other factors to consider that may impact your retirement way down the road.

 

The first thought is inflation. We have been spoiled for the past several years with a historically lower than average inflation rate according to the U. S. bureau of statistics.  On top of that, the statistics that you hear about in the popular press exclude two very important categories. These stats exclude food and energy costs, which may or may be more volatile 10 or 20 years from now.

 

These statistics also do not include price increases that are due to performance improvements. Each year, the inflation numbers routinely exclude quality enhancements to certain products or services, even if that product or service is no longer offered without the enhanced new feature or benefit.

 

This may be material for someone who likes to stay ahead of the technology and quality curve. Perform a stress test on your savings, and run a scenario with significantly higher inflation and see where that leaves you.

 

Another factor is your assumed rate of return. What are you using in your forecasts? Of course, we all know what fixed rates are today. For many, using today’s guaranteed rates alone will flag a potential problem way down the road. But even for those with risk in their portfolios are not guaranteed to hit their total return targets.

 

Many experts are warning that riskier assets classes may not grow in the next decade or two as well as they did during the last bull market run with greater volatility. This will be a challenge for conservative investors who need more than what today’s risk free rate of return may provide.

 

Their challenge is to be a bit more tactical in their allocations, and actively attempt to avoid losses while increasing your to more asset classes.

 

Taxes will also change. While no one knows for sure whether income taxes will go up or go down, most professionals would suggest that you consider higher taxation in the future. Stress test your net cash flow in retirement by assuming a tax increase, and see what that does to your nest egg.

Another factor that many will not completely consider is longevity. People are living longer today. This can cause several issues for you later in life. Take a look at your basic living expenses if you add another ten years of life. Is your savings adequate to handle that extra ten years? What does your forecast look like if you purchase long term care insurance?

 

While that may mitigate the consequences of a long term catastrophic illness, the cost of the coverage itself may be an expense that gives rise to future cash flow shortages.

 

There are two ways to settle this issue for you. Run the numbers under a few stress test scenarios or stick your head in the sand and spend less.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

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