Irwin Consulting Planning in Singapore and Tokyo, Japan on 3 costs that can destroy retirement

<strong>Irw<strong>in</strong></strong> <strong>Consult<strong>in</strong>g</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> S<strong>in</strong>gapore <strong>and</strong> <strong>Tokyo</strong>, <strong>Japan</strong> on 3 costs that
can destroy retirement
Retirement security is a holy grail that many <strong>in</strong>vestors chase. A recent AARP survey revealed that 74 percent of private
sector workers are anxious about hav<strong>in</strong>g enough money to live comfortably <strong>in</strong> retirement.
Although <strong>in</strong>creas<strong>in</strong>g sav<strong>in</strong>gs may seem like the answer, creat<strong>in</strong>g a susta<strong>in</strong>able retirement strategy is a bit more complex.
Investors must also plan for costs that can detract from their portfolio's growth. "Taxes, long-term care <strong>and</strong> <strong>in</strong>flation all
have the potential to eat away at your retirement sav<strong>in</strong>gs," says Marcy Keckler, vice president of f<strong>in</strong>ancial advice strategy
at Ameriprise F<strong>in</strong>ancial <strong>in</strong> the greater M<strong>in</strong>neapolis-St. Paul area. "Not plann<strong>in</strong>g properly could result <strong>in</strong> a substantial blow
to your portfolio from a sudden need for extended care, or <strong>in</strong>flation could slowly chip away at your nest egg."
Health care may be the biggest threat. Long-term care poses two problems for retirees. First, the cost can be
stagger<strong>in</strong>g. Genworth F<strong>in</strong>ancial puts the average annual cost of nurs<strong>in</strong>g care <strong>in</strong> a semi-private room at $85,775. Assum<strong>in</strong>g
a typical two-<strong>and</strong>-a-half-year stay, the total bill for end-of-life care easily surpasses $200,000. The second issue is that
these expenses don't fall under the Medicare coverage umbrella. Medicaid will pay for long-term care but requires seniors
to spend down their assets to qualify.
Long-term care has the potential to be the most devastat<strong>in</strong>g to an <strong>in</strong>vestor's retirement strategy, says Steven Yager, a
f<strong>in</strong>ancial advisor with Yager & Associates <strong>in</strong> Northville, Michigan. The root problem is longevity. "People often assume
that s<strong>in</strong>ce their parents or gr<strong>and</strong>parents lived to a certa<strong>in</strong> age, they'll live to a similar age. They then base their retirement
plan on this uneducated assumption about their own life expectancy."
Health care can encroach on your retirement security when expectations don't match reality. There are two possible
solutions: Self-fund these expenses or <strong>in</strong>vest <strong>in</strong> long-term care <strong>in</strong>surance. Self-fund<strong>in</strong>g may require you to <strong>in</strong>crease your
current sav<strong>in</strong>gs rate or reth<strong>in</strong>k your overall strategy. For example, you may need to ma<strong>in</strong>ta<strong>in</strong> a larger share of stocks to
generate growth <strong>in</strong> your <strong>in</strong>vestments for a longer period if you're try<strong>in</strong>g to fill a long-term care fund<strong>in</strong>g gap.
Long-term care <strong>in</strong>surance can cover health care costs while leav<strong>in</strong>g your portfolio <strong>in</strong>tact, but because of their high
premiums, these policies may suit some <strong>in</strong>vestors better than others. "It comes down to your asset base," says Jason Laux,
vice president of Synergy Group <strong>in</strong> White Oak, Pennsylvania. "For people without a lot of assets, long-term care <strong>in</strong>surance
usually isn't appropriate. For those who are wealthy, it may make more sense to be grow<strong>in</strong>g <strong>and</strong> <strong>in</strong>vest<strong>in</strong>g your money."
Investors <strong>in</strong> the middle, with assets rang<strong>in</strong>g from $350,000 to $1 million, could benefit most from a long-term care policy.
Although these <strong>in</strong>vestors may not have enough wealth to self-fund, they can afford the higher premiums to avoid the
Medicaid spend-down requirement.
Protection from higher prices comes at a cost. Inflation can be detrimental to retirement sav<strong>in</strong>gs. Research from
<strong>in</strong>surance consultancy LIMRA suggests that a retirement portfolio could lose more than $73,000 <strong>in</strong> purchas<strong>in</strong>g power
from a 2 percent <strong>in</strong>flation rate. The effects of <strong>in</strong>flation may be compounded when <strong>in</strong>creases <strong>in</strong> certa<strong>in</strong> expenses – such as
health care – outpace ris<strong>in</strong>g prices <strong>in</strong> general.
Includ<strong>in</strong>g <strong>in</strong>flation-hedg<strong>in</strong>g <strong>in</strong>vestments <strong>in</strong> your retirement plan offers a measure of protection for your portfolio.
Annuities <strong>and</strong> Treasury <strong>in</strong>flation-protected securities are two options for tam<strong>in</strong>g <strong>in</strong>flation's effects.
Annuities are designed to provide tax-deferred growth <strong>and</strong> generate a guaranteed stream of <strong>in</strong>come, which can
supplement <strong>in</strong>come from tax-advantaged retirement accounts, taxable <strong>in</strong>vestments or Social Security benefits. With TIPS,
the pr<strong>in</strong>cipal value of the <strong>in</strong>vestment adjusts up or down <strong>in</strong> t<strong>and</strong>em with changes <strong>in</strong> the consumer price <strong>in</strong>dex. These
<strong>in</strong>vestments yield lower returns compared to stocks, but they can be useful by shield<strong>in</strong>g <strong>in</strong>vestors aga<strong>in</strong>st the negative
effects of <strong>in</strong>flation.
While both annuities <strong>and</strong> TIPS can benefit <strong>in</strong>vestors <strong>in</strong> retirement, there are some downsides to consider, says Joy
Kenefick, manag<strong>in</strong>g director of <strong>in</strong>vestments with Wells Fargo Advisors <strong>in</strong> Charlotte, North Carol<strong>in</strong>a. Annuities can offer
guaranteed <strong>in</strong>come or guaranteed protection <strong>in</strong> volatile or decl<strong>in</strong><strong>in</strong>g markets, but the expenses, complexity <strong>and</strong> lack of
liquidity may make them a less than perfect fit for your <strong>in</strong>vestment needs.
TIPs, by comparison, offer modest returns <strong>in</strong> exchange for protection aga<strong>in</strong>st market volatility <strong>and</strong> <strong>in</strong>flation. The benefit
they offer comes at the cost of performance <strong>and</strong> growth, Kenefick says. Before buy<strong>in</strong>g <strong>in</strong>to either one, assess the value <strong>and</strong>
purpose of these <strong>in</strong>vestments for your retirement strategy.
Diversification should address this overlooked risk. Many <strong>in</strong>vestors diversify their assets for risk but not for taxes,
Laux says. "They funnel the majority of their <strong>in</strong>vestments <strong>in</strong>to pre-tax accounts <strong>and</strong> are told they'll be <strong>in</strong> a lower tax

acket when they retire but often don't f<strong>in</strong>d that to be true." Without tax diversification, he says, you could end up pay<strong>in</strong>g
the maximum taxes on all your retirement assets.
Creat<strong>in</strong>g tax diversification beg<strong>in</strong>s with know<strong>in</strong>g what you've <strong>in</strong>vested <strong>in</strong> <strong>and</strong> where those <strong>in</strong>vestments are held. Tax<strong>in</strong>efficient
<strong>in</strong>vestments, such as bonds, belong <strong>in</strong> tax-deferred accounts, while tax-efficient vehicles, like stock <strong>in</strong>dex funds,
should be held <strong>in</strong> taxable accounts. Growth stocks can be used <strong>in</strong> a 401(k) or similar account to capitalize on the
compound<strong>in</strong>g benefit of tax deferral, says Mel<strong>in</strong>da Kibler, a certified f<strong>in</strong>ancial planner with Palisades Hudson F<strong>in</strong>ancial
Group <strong>in</strong> Fort Lauderdale, Florida.
M<strong>in</strong>imiz<strong>in</strong>g the tax bite on your <strong>in</strong>vestments becomes even more important when you beg<strong>in</strong> withdraw<strong>in</strong>g money from
those accounts. "The way <strong>in</strong> which an <strong>in</strong>vestor harvests from their portfolio is more consequential than the way one saves,"
Kenefick says. Investors should tap non-qualified accounts first, she says, leav<strong>in</strong>g tax-sheltered accounts to compound <strong>and</strong>
avoid "the erod<strong>in</strong>g effects of pay<strong>in</strong>g taxes for as long as possible."
Calculat<strong>in</strong>g your target withdrawal rate accurately also matters. Daniel Pr<strong>in</strong>ce, head of product consult<strong>in</strong>g for BlackRock's
iShares U.S. wealth advisory bus<strong>in</strong>ess, says an optimal withdrawal strategy requires retirees to be accurate on both sides of
the ledger. Retirees should be realistic about their <strong>in</strong>come <strong>and</strong> assets, <strong>and</strong> balance that aga<strong>in</strong>st their spend<strong>in</strong>g. "Taxes will
always be a cost," Pr<strong>in</strong>ce says, but between long-term care <strong>and</strong> <strong>in</strong>flation, it's the easiest of the three to proactively reduce.