Vail Daily column: How to protect your retirement assets
Saving for retirement cannot take place in a vacuum. Whether you are just starting out, nearing retirement or already enjoying those golden years, it’s important to be aware of the risks we all face. That’s where a retirement plan comes in — it helps you identify risks to your retirement assets and formulate strategies for addressing them.
Risk is usually defined as the potential for loss. When most people think of financial risk, they focus on investment risk and the potential for loss due to downturns in the economy, changing interest rates, inflation or poor management of the companies in which they invest. These risks are typically addressed through diversification of one’s assets — selecting different types of investments across several industry sectors. Please note that there is no guarantee that diversification will ensure a profit, or protect your investment against losses in declining markets.
But risk of loss also arises from life events such as illness, disability or death.
While most people look to health insurance to pay for health care, finding adequate insurance is increasingly difficult. Rising premiums have forced many employers to shift a greater share of the burden to employees and to discontinue health coverage for retirees. The answer is to be prepared for the unexpected. Many experts recommend health insurance with high deductibles and co-payments as a way to keep premiums down, yet protect against catastrophic loss. This suggests keeping a portion of your retirement assets in cash to pay for doctor and emergency room visits, routine physicals, tests and prescription drugs.
Long-term care risks
Another risk is chronic illness or a disability that requires not only medical treatment but also ongoing custodial care. Whether the care is delivered in your home or at a nursing facility, it can be expensive.
Keep in mind, that while Medicare covers most medical procedures and treatment for individuals, it is not intended to pay for extended or long-term custodial care. And although Medicaid, a program sponsored jointly by state and federal governments, covers long-term care services, eligibility depends on meeting strict guidelines and you may be forced to spend down to qualify.
A possible solution is long-term care insurance. As more and more people live longer lives, the risk of requiring long-term care increases.
Financial Loss Due to Death
The financial loss due to the death of a wage-earner can be devastating. Sometimes overlooked is the impact on a surviving spouse’s retirement. Assets that had been earmarked for retirement including IRAs, mutual funds and 401(k)s may need to be tapped for immediate needs. Life insurance can be an affordable way to provide generally income tax-free death benefits (See IRC Section 101(a)) to survivors at the time they need it most. Death benefits can be used to settle outstanding doctor bills, funeral expenses and other death-related costs. The balance can be used to help pay off mortgage and other debts, fund college education tuitions and provide income for survivors, leaving retirement assets intact for the purpose for which they were intended.
Many individuals find that life insurance needs diminish during retirement as mortgages are paid off and children become financially independent. On the other hand, increasing estate values and the potential for increased death taxes can increase life insurance needs during retirement. Life insurance can also be a good solution for retirees who wish to provide a bequest to a favorite charity or create a legacy for their heirs.
A long-term disability results in a financial strain that is similar to the death of a breadwinner. With a wage earner unable to work or earn at the same level, it is easy to divert retirement savings to more immediate needs. Individual disability income insurance is a good solution, for self-employed professionals and other high-income individuals.
While risk cannot be avoided, it can be managed. It’s important to keep in mind that in a world with many risks, you’re not alone.
Charles Smallwood is a financial advisor with The Prudential Insurance Co. in Edwards. He can be reached at email@example.com, at 970-432-0045 and 970-390-1249. Prudential Financial, its affiliates and representatives do not render tax or legal advice. An individual’s particular circumstances should be discussed with a personal tax or legal advisor.