Four Steps to Avoid Poverty in Retirement
This article, originally written in July 2005, is republished with minor editing.
I do not like to use the words “poverty” and “retirement” in the same sentence. My business is about helping people enjoy a nice lifestyle in retirement without worrying about being short on money. But the new rules of retirement force us to confront this issue.
Government statistics reveal that 63% of people age 65 and older have annual incomes under $25,000.1
Government and employers guaranteeing retirees income and health benefits throughout their retirement is the way it was. More and more, as people are living longer, both the government and employers are decreasing retiree benefits and shifting more of the financial burden on us.
The challenges are real. Longevity, reduced benefits, inflation, market risk, and rising health care costs are converging to create what some have called “the perfect storm” for retirees.
These four steps can help you steer clear of the storm.
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Prepare for the unexpected. You cannot prepare for every disaster that could strike, but you can have a cash fund for emergency expenses. Having the right insurance for liability, sickness, death, disability, and/or long term care also makes good sense for many people.
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Save as much as you can. A vital part of good financial planning is having cash flow margin to invest for future needs. If we spend it all now, there is no money for future needs. Predictably, a large majority of retirees polled regret not having saved more for retirement. Don’t just be a money conduit. Let some of it stick to you on the way through.
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Don’t settle for pitiful returns. People often play it too safe and sacrifice eating well later for sleeping well now. Inflation over time can ravage your retirement assets. At least give yourself the chance of getting the returns you need for a better retirement.
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Don’t take too much risk. Chasing returns, buying overvalued stocks, and not being properly diversified, to name a few, are risky mistakes that can leave you sweeping up after everyone else has left the party. And sadly, too many of those burned over the last few years have too little time to make up the losses.
To do your best financially, planning is crucial. Good planning puts real numbers to your goals. Early planning makes the goals easier to achieve. It is no surprise that those most satisfied in retirement are those who planned early.
1 Source: Social Security Administration, The Office of Policy, Income of the Population 55 or older; February 2002