Thursday, August 5, 2010

Minimise risks of retirement


WASHINGTON - Retirement is full of risks. There's the risk of sickness and needing expensive care, or of running out of money or of being divorced or widowed.

The problem with many retirement plans is that they try to treat all of these risks with a single solution -- save more money or buy an annuity.

"There are multiple risks in retirement, and it's wise to insure against each of them, to the extent insurance vehicles are available and affordable," says Frank Todisco of the American Academy of Actuaries.

Here are some of the risks that can occur in retirement and some ways to insure against them.

-- You may not have enough money to afford your lifestyle. This is the first risk everyone talks about. The best way to prepare for it is to save. You can also protect yourself against this risk by delaying retirement and the start date of your Social Security benefits.

Cultivate the skills and contacts that could net you part-time income after retirement. Do the lifestyle analysis necessary so that you know how much of your current way of living you could give up. Sometimes the only 'insurance' you need is the flexibility to know you could downsize and still enjoy life.

-- To address the need for extensive healthcare there is long-term care insurance. Policies have improved from their early days, and premiums now are tax deductible. But shop carefully. Some policies cover only nursing home costs. Others also cover care at assisted living facilities and at home. Most policies require you to have some physical or cognitive problem that makes it necessary for you to get help with the activities of daily living. Policies also have different rules about how long they will pay, how much they will pay, and whether their benefits will rise with inflation.

-- Long-term care insurance will not pay your rent every month if you live to be 98 and are still healthy and somewhat self-sufficient. To insure that you'll not run out of money over a long, long life, many advisers are starting to recommend a product called "longevity insurance."

It's really a deferred annuity that you defer for a very long time. In an example provided by, you might buy it for a one-time payment of $25,000 when you are 65, and it won't start paying until you're 85. At that time it would pay $3,000 every month for the rest of your life. A product like that might be competitively priced enough to take a chance on, if good genes run in your family. If you invested $25,000, earned an 8 percent return every year, and then took out $3,000 every month, you'd be out of money in fewer than four years.

Another approach is to buy several immediate annuities at different times in your retirement, a strategy called an "annuity ladder" that is recommended by Virginia financial advisor Bob Carlson, editor of Retirement Watch newsletter (

When you buy an immediate annuity, you turn over a flat sum to an insurance company which promises to pay you monthly for the rest of your life. Most advisers recommend that retirees only annuitize a portion of their savings anyway.

He takes it a step further by suggesting retirees phase in their annuity purchases over several years. That would protect them from the possibility of losing out: buying a big annuity and dying before receiving many payments. It would also help you to bump up the monthly amounts you receive from those annuities. They would be larger in the future both because they'd be calculated on your (presumably shorter) life span, and because they would be calculated on the basis of bond yields that might be expected to rise from today's comparably low rates.

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