Inflation, longevity may eat up retirement savings

by Richard Hale

for the Business Journal

It's a wonderful life, as the saying goes. As we grow older, we have time to appreciate the more important things like family, friends, a beautiful sunset, a colorful garden. One reason why we have that time is because people are living longer than ever before.

The National Center for Health Statistics reports that today, a 66-year-old is expected to live to age 82. With the possibility of living 17 years in retirement, planning becomes an important issue. And planning for the "average" retirement may not be adequate for healthy people with a family history of longevity.

According to New York Times Magazine, retirees over 65 have enjoyed an increase in median income of 170 percent since 1947, mostly because of Social Security benefits. That increase was just 49 percent for the general population. Still, the more years spent in retirement, the more income retirees will need to maintain the lifestyles they want.

That means staying ahead of inflation and taxes. If your retirement nest egg is in a fixed-income investment, it may not keep up with inflation. It's simple arithmetic. An asset returning 5 percent, with inflation at 4 percent, has a real return of only 1 percent.

To put it another way, if you need an annual income in

retirement of $50,000 to enjoy retire-

ment life today, you'll want an annual income of more than $74,000 in 10 years, assuming an annual inflation rate of 4 percent.

At the same time, you may also want to provide money for your children, grandchildren or favorite charity. Of course, expenses change after retirement costs like dry cleaning and commuting go down, and you may no longer have a mortgage or tuition bills.

On the other hand, costs for home repairs, travel, hobbies and sometimes dependent children may go up. Although all but 1 percent of Americans 65 and over are covered by Medicare or other health insurance, medical expenses can increase dramatically compared to when an employer plan paid much of the health care premiums.

If you're like most retirees, you have purchased Medigap insurance and you may be paying for prescriptions and eye care.

There are many finance software programs, tools and services available for calculating retirement financial flow that is, money coming in, money going out, and its effect on a household's total nest egg. Many have inflation and tax calculators.

Because tax laws change so rapidly, however, it's important to use the most recent versions of these programs.

How long will your nest egg last? If you have a nest egg set aside, how much you withdraw each month will dictate how long it will last.

If you withdraw only the interest, never touching the principal, your nest egg may last indefinitely.

For example, a nest egg of $100,000 earning a 5.5 percent annual yield compounded quarterly will last for 10 years if you withdraw $1,069 a month. With a $500,000 nest egg, you can withdraw $5,345 for 10 years before it's gone. With $1 million, you can take out $10,700 a month.

Don't forget that investment performance can dramatically affect these numbers as charted below.

You may be able to manage your retirement nest egg to provide for more cash flow. Ask your financial adviser to show you strategies that use a balance of different investment categories, including CDs, corporate and tax-exempt bonds, annuities and large-company stocks.

By analyzing your specific income needs, your tax bracket, historical performance of these investments and your risk tolerance, your adviser can help you make the most of your retirement income so it will be a wonderful life.

(Richard A. Hale, CFP, is a financial advisor with American Express Financial Advisors Inc.)

INSET CAPTION:

If your retirement nest egg is in a fixed-income investment, it may not keep up with inflation.

CHART:

For $100,000 to last: Your withdrawal per month:

10 years $1,069

20 years $674

Indefinitely $443

For $500,000 to last: Your withdrawal per month:

10 years $5,345

20 years $3,372

Indefinitely $2,216

For $1,000,000 to last: Your withdrawal per month:

10 years $10,700

20 years $6,740

Indefinitely $4,440

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