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Planning for Retirement Continued

CenterSite Updated: Oct 10th 2006

Guideline 3: Don't Forget Health care Needs!

Planning for health care needs during retirement is another important retirement consideration that is easy to miss when planning takes place during the prime of your life. Though you may be healthy today, it is likely that your health care needs will accelerate as you age. While most retiree will become eligible for Medicare Parts A, B & C at age 65, the cost of Medicare and health insurance supplement costs must be considered in your financial plans.

Guideline 4: Diversify Your Retirement Investments.

It is not enough to simply save money for your retirement. You will likely need to invest it in tax-sheltered retirement accounts so as to take maximum advantage of compounding interest over time. As should be the case with any investments, your retirement investments should be diversified. Investments, savings, real estate holdings, and any other assets should be apportioned according to an overall financial plan.

In retirement, your tolerance for risk to your principal (the money you have saved) will decrease sharply compared to what you could tolerate during your earning years. More risky sorts of investments with higher potentials for return are most appropriate during your early years. As you get closer to your retirement, you will be wise to adjust your portfolio so that it becomes more risk-adverse, so as to lock in what you have gained with greater security. This means you will need to shift your holdings towards less volatile investment vehicles and holdings that are focused more on income than on growth. This does not mean that you should sell all your stock and mutual fund investments in favor of bonds. You should hold on to some equity investment vehicles (stocks) because you will still need some growth to keep pace with inflation and to ensure that you do not outlive your money. Equity investments should account for a smaller percentage of your total holdings in retirement, however. Adequate diversification will smooth out the fluctuations in the market and will provide you will more stable income.

Beyond conventional investments in stocks, bonds and mutual funds, you may also wish consider real estate as a source of retirement income. Many people buy a primary residence as an investment and sell it after retirement. Proceeds from the sale of the home can be used to buy a smaller, less-expensive residence and leftover cash can be banked. Another option is to buy real estate for the purpose of renting it out. Rental property can be an excellent source of retirement income. Rental rates tend to increase over the years, faster than inflation in many instances. There are some drawbacks to real estate however. There are maintenance, legal and tax concerns to attend to if you intend to rent your property. Also, there is no guarantee that property values will increase over time or that you will be able to make sure that the property is rented all of the time. Your neighborhood could experience a decline and your investment might decrease in value.

Even with the best of planning, meeting retirement investment goals can be difficult to control. As a result of all of the improbables many professionals consider working into their retirement as consultants. This enables them to continue to earn income while having flexible work arrangements.

Lastly, once you are retired, you should focus on making your withdrawals tax-efficient. Your goal should be to give as little of your hard won retirement income over to the government as is legally and ethically possible. In order to do this in a reasonable manner, use up your taxable investment accounts first, paying taxes on the money you withdraw from these accounts as is required. Doing so allows you to let your tax-sheltered retirement account investments alone to continue to compound for as long as possible. For example, it is more advantageous to withdraw money first from taxable accounts, then from 401(k) and IRA type tax advantaged accounts, and then finally from a Roth IRA (all described below) for example. Making simple choices like these can save you thousands of dollars during your retirement.


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