And, the dollar amount of COLAs will be larger down the road, since they’ll be calculated against a larger benefit amount. Working longer also means fewer years of drawing down your retirement savings, and additional years of contributing to those accounts.
Stick with stocks. The prospect of higher retiree inflation also argues for keeping at least some portion of your portfolio in equities well into retirement.
Rob Arnott, CEO of Research Affiliates, has argued that target-date funds take risk and return off the table too quickly for pre-retirees and that they are forcing millions of retirement investors into negative-return fixed-income vehicles, mainly Treasuries.
Wade Pfau and Michael Kitces think the risk of portfolio failure in retirement actually is lower for investors who start retirement with a relatively low equity allocation and then increase stock allocations to 70% or 80% over time. (Pfau is a professor of retirement income at the American College; Kitces is director of research at Pinnacle Advisory Group.)
Larry Rosenthal, president of Rosenthal Wealth Management Group, agrees.”Putting your money only in secure investments is a good way to go broke over time, because you lose purchasing power,” he says. “Just because you reach retirement age, that doesn’t mean you won’t need money at 75, 85, or 95–you’ll need it to cover inflation and taxes down the road. So, you need to turn your portfolio into income and grow it at the same time.”
Rosenthal offers the example of a client who needs $7,000 in monthly aftertax income, who receives $4,000 combined from Social Security and a pension. If the client has a $1 million investment portfolio, he needs a 3.6% return to generate the $36,000 that would plug that $3,000 monthly income gap. “So, you would want to make sure some of the money is in a growth and income mutual fund–perhaps 70% stocks and 30% bonds. It’s designed to grow and kick out income. The rest of the portfolio would go into a conventional 60-40 stock-and-bond allocation.”
Be a smart healthcare consumer. Learning to be an educated consumer of health insurance can help. The Medicare program has plenty of moving parts, and you can benefit by making smart buying decisions. This starts with the basic question of enrolling at the right time to avoid costly penalties and continues with a decision of whether to enroll in traditional Medicare or Medicare Advantage, the all-in-one managed-care alternative. Medicare Advantage usually doesn’t charge separate prescription-drug premiums and doesn’t require a Medigap plan. (In fact, Advantage participants can’t buy them.) The trade-off is flexibility, since enrollees must use in-plan healthcare providers.
Also, reshop prescription-drug coverage regularly, since plans’ terms of coverage for drugs often change from year to year–and so might your medication needs. One research study found that almost one quarter of Part D enrollees could save at least $500 annually by picking a cheaper plan better suited to their drug needs.