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5 Methods of Protecting Yourself Against Common Financial Shocks in Retirement Planning

By    |   Tuesday, 16 June 2015 11:53 AM

Potential threats to retirement security come in many forms, and from several directions. Retirement planning is partly about blunting the effect of these all-too-common financial shocks.

Here are some of the self-protection methods recommended by retirement planners and financial advisers.

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1. Health Care
Preventing health-care costs from depleting your retirement income is crucial. Expert estimates of out-of-pocket health spending for retirees start around $200,000, and climb from there — and these are the routine expenses, separate from bills for catastrophic care.

Not getting blindsided means coming up with a solid estimate of your retiree health costs. One way is to use the AARP's Health Care Costs Calculator, and from there, make more informed choices about what mix of private insurance, Medicaid and, where needed, supplemental health savings accounts, AARP retirement expert Jean C. Setzfand wrote.

2. Supplemental Insurance
Taking out supplemental insurance while you're still on the job — short- or long-term disability coverage — can protect your retirement planning on another flank: earnings lost to illness or injury.

This "income replacement insurance," as The New York Times dubbed it, is often available through your employer. But, as with regular health insurance, access to disability coverage is shrinking at the workplace, and more of the decision making — and the cost — falls to the individual trying to find a supplemental policy.

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3. Inflation
Trying to account for future inflation is another form of income protection. Social Security does this through regular cost-of-living adjustments to retiree benefits. But if Social Security isn't your sole support in retirement, "Many financial products also offer the ability to purchase inflation protection," Forbes contributor Jamie Hopkins wrote.

Hopkins cites annuities and long-term care insurance that come with extra options for preserving "purchasing power over a long retirement," but with the caveat that "too much inflation protection" can also diminish a policy's returns.

4. Diversification
Keeping a retirement portfolio balanced and diversified — not too heavily invested either in risky stocks or slow-growing bonds — is a strategy for buffering your nest egg against the extremes of the marketplace, especially in the event of a sharp downturn or major financial collapse. This is the essence of what wealth managers call "asset allocation" — the weighting of investments so that low growth or negative returns in one area area offset by robust growth in another, and don't pull down the entire portfolio.

5. Debt
The last recommendation is the simplest and most commonsense: Don't overspend, either before or during retirement. Accumulating unnecessary household debt creates a drag on the growth of your retirement investment accounts, and the shock is discovering how much of a drag if the debt isn't paid off once retirement income becomes your sole means of support.

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Potential threats to retirement security come in many forms, and from several directions. Retirement planning is partly about blunting the effect of these all-too-common financial shocks.
retirement, financial shocks
Tuesday, 16 June 2015 11:53 AM
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