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When Planning for Retirement, Expect the Unexpected

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November 2003
When Planning for Retirement, Expect the Unexpected

If you think you're on track to have enough money for retirement, you may want to double-check. According to the most recent Retirement Confidence Survey, conducted by the nonprofit American Savings Education Council (ASEC), 19% of retirees say their overall standard of living is worse than they expected when they retired. (Source: ASEC, 2002 survey, www.asec.org.)

The survey also reports that, on average, respondents retired several years earlier than planned, often because of unexpected reasons, such as a health problem or company downsizing. While the idea of early retirement might not sound bad, it can have a serious effect on those who expected to have a few more years of steady income. Fortunately, you may be able to sidestep such problems by taking time now to prepare for the unexpected costs of retirement.

Prepare for Unplanned Circumstances

When it comes to calculating how much money you'll need in retirement, it's important to think beyond your basic monthly expenses, such as grocery, housing, transportation and utility bills. Take time to consider a wide range of potential future events.

Ask yourself, for example, if you'd be financially prepared for the high costs of a medical emergency or the long-term costs of staying in a nursing home. ASEC survey findings show that retirees often fail to consider several other key financial issues, including:

- Rising health care costs and decreased Medicare coverage.

- Higher-than-expected cost-of-living expenses.

- Social Security or pension benefits that are lower than anticipated.

- Investments that do not perform as well as expected.

Know What You'll Need

To avoid a financial pinch in retirement, start by getting an accurate picture of your anticipated retirement income. Add up the income you expect to receive annually from different sources, such as your employer-sponsored retirement plan, Social Security benefits, your personal investment portfolio and your individual retirement account (IRA). Once you've calculated your retirement income, compare it to what you expect to be making when you retire. To maintain your standard of living in retirement, most experts suggest you'll need a number that's at least 70% - 80% of your pre-retirement income.

Supercharge Your Nest Egg

If you find you need to make up for an unplanned shortfall, make sure you're contributing the maximum to your IRA and employer-sponsored retirement plan. This year, you can stash up to $3,000 into your IRA. The federal limit on IRA contributions will rise to $4,000 in 2005 and $5,000 in 2008. And if you 're over age 50, you can contribute an extra $500 in 2003 - an amount that will rise to $1,000 by 2006.

If you don't already have a taxable investment portfolio, consider opening one. Although it can't offer the tax benefits of an IRA, it can help you build additional funds toward retirement. And saving as much as you can as early as you can is perhaps the most important step in successfully building a retirement nest egg. That's because time is the crucial ingredient of compound interest, which allows your retirement savings to grow not just on its original principal, but also on its growth in prior years.

The longer you stay invested and regularly add to your earnings, the more dramatically compound interest can increase the value of your investment. For example, if you put $100 a month into an investment that earns an average of 7% annually, your investment would grow to more than $17,600 in just 10 years and more than $52,300 in 20 years.

Take Steps to Prevent Future Problems

To further protect yourself against unexpected financial problems in retirement, consider the following tips:

? Evaluate your medical insurance coverage. If Medicare will be your main source of health insurance in retirement, consider supplementing it through private insurance or your employer-sponsored insurance plan, if such a plan is available to company retirees.

? Get a firm grip on cost-of-living expenses. Because some parts of the country are more expensive than others, your cost of living in retirement will likely vary depending on where you live. Moving to a rural area, for example, may mean a lower cost of living, while moving to a large urban area may mean higher costs.

? Don't overestimate investment returns. Determining rates of return on an investment portfolio can be complex. Work with your professional financial advisor to get a clearer picture of the potential risks and benefits associated with the assets in your portfolio or retirement plan.

? Consider long-term care insurance. Without insurance, an extended stay in a nursing home could be financially devastating in your retirement years. A study conducted in 2000 by the American Council of Life Insurers estimates the average cost of staying in a nursing home will reach more than $190,000 annually by 2030.

The younger you are when you purchase long-term care insurance, the cheaper it is to buy coverage. Many insurance-industry experts recommend buying long-term care insurance before age 60 to lock in lower premiums. You may want to consider buying even earlier if you have concerns about potential health problems that could make you uninsurable.

Plan for a longer retirement. Remember that your nest egg may need to last for many years beyond your retirement age. While the average life expectancy of Americans was less than 65 in the 1950s, the average American today can expect to live until nearly age 77, according to the U.S. Department of Health and Human Services.

Create a Plan that Will Last a Lifetime

Make sure your retirement strategy is built to withstand a variety of life events and market conditions by meeting with your professional financial advisor. Your qualified financial advisor can help you get a better idea of your overall preparedness, based on your current financial status and your plans for the future.

This article was contributed by Harsh Mehra with American Express Financial Advisors. Harsh is a senior business and financial advisor with American express. Since 1998, he has assisted hundereds on individuals and business owners for their financial planning needs. for questions, he can be reached at (678) 990-0010 ext. 304 or email at harsh.j.mehra@aexp.com.

This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation.

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This article was contributed by Harsh Mehra with American Express Financial Advisors. Harsh is a senior business and financial advisor with American express. Since 1998, he has assisted hundereds on individuals and business owners for their financial planning needs. for questions, he can be reached at (678) 990-0010 ext. 304 or email at harsh.j.mehra@aexp.com

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This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation.


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