Anticipating The Unexpected
ANTICIPATING THE PREDICTABLE
Among the eventualities you have to anticipate is the possibility of dying while others are dependent on you for financial support. One of the ways to help protect them is to have adequate life insurance.
No matter how carefully you prepare for retirement, there's always something you can't predict. Sometimes you're surprised by good news, such as a generous inheritance or years of strong investment performance. But it's important to be realistic in your planning. That means taking precautionary steps to cushion yourself, and those who are dependent on you, from the financial strains that can result from illness, unstable economic markets, and other problems.
Nobody plans on being sick, but the reality is that as you grow older you are increasingly vulnerable to illness or injury. So it pays to plan ahead.
You can use different types of insurance to help protect your financial health.
Long-term care insurance is designed to cover medical and nursing care over an extended period of time. Keep in mind, if you're considering this approach, that the premiums and cost of the insurance will be greater the later you buy. If you try to purchase a long-term policy in your 70s, for example, the premiums may be prohibitive. But if you buy earlier, and cheaper, the benefits your plan offers may be vulnerable to inflation since the reimbursement amounts are often fixed. You should look for a plan that automatically boosts the benefits as time goes by or lets you buy additional coverage to offset inflation.
Disability insurance pays you a percentage of your salary if you can't work because of illness or injury, and catastrophic illness insurance covers your medical costs if you exceed the upper limit your regular health insurer will pay.
One alternative to insurance is to buy an annuity to provide income you can use to cover the costs of long-term care or disability should the need arise. Or you could arrange to use the annuity benefit to actually pay the premium for a long-term care policy. Another approach is to set up a medical savings account, much as you establish an account earmarked for education or retirement, and invest an amount equal to the premiums you'd pay for insurance. That approach may offer greater flexibility since you can use the money for other things if you remain healthy and independent, but there's no guarantee you'll accumulate the assets you'll need should you require extended care.
Another reality you have to face is that your investments may lose value, especially in the short term. Or interest rates may drop and reduce your anticipated income.
When equity markets produce b earnings, it's easy to forget that prices and dividends can move down as well as up. So while you need equity investments for long-term growth, counting on their performance on a daily basis can be unsettling. For example, if you're planning on an 8% annual return on your stock and mutual fund investments, so that you can withdraw at a high enough rate to meet your needs but not eat too far into your principal, a period of lower returns can disrupt your plans.
The same is true of fixed-income investments. If you have money invested in older bonds paying at 6.5% and the best rate you can find to reinvest your principal is 4.5% when a bond matures, your annual income on a $100,000 bond investment would drop $2,000. The lower the current rate, the greater the loss of income could be.
Over time, tax laws are modified to reflect changes in the economy, shifts in political thinking, and evolving attitudes toward investing. For example, the former penalty for excess withdrawals from IRAs and other retirement plans has been dropped and the ceiling on contributions to most plans has been raised. Additional ways to accumulate tax-free savings have been introduced.
Of course, there's no way to predict the rate at which you may have to pay taxes on your future earnings, or whether the rules governing tax-deferred and tax-free investing or estate taxes will be tightened or relaxed. But, you can still take advantage of the existing opportunities to build your retirement assets and hope for a resolution that works in your favor.
What sometimes happens is that existing rules are grandfathered. That means they continue to apply to existing plans, but not to new ones. But that hasn't been as common in the recent changes as it once was.