In 2007, the price of oil rose an astounding 57%. A lending crisis brought one of Wall Street’s venerable investment banks to its knees. Inflation jumped above 4% for the first time in nearly two decades.
What do these events have in common? They were largely unexpected. Let them serve as a reminder that other unexpected events are lurking out there, waiting for their time in the sun.
As you work toward your financial goals, have you considered whether you are also preparing for the unexpected? Taxes, inflation, and medical costs – among other factors – could have an unanticipated effect on your retirement. There may be little you can do to combat them once you are no longer working.
What if medical costs are more than anticipated? It is becoming increasingly common for people to retire without the benefit of employer-sponsored health insurance. In 2006, just 19% of employers with 500 or more employees offered health benefits to Medicare-eligible retirees, down from 40% in 1993. Without employer health insurance, a 65-year-old couple retiring this year will need an estimated $225,000 to cover their medical expenses in retirement.
What if inflation is higher than you anticipated? Looking at the 2.7% average annual inflation rate of the past 10 years could make you forget how dangerous inflation can be. But inflation made a serious comeback in 2007, rising to 4.1%, which is more in line with the 30-year average of 4.2%.
What if taxes go up? Current tax rates are low by historical standards, but the nation is facing huge obligations to Medicare and Social Security. Congress so far has quashed any effort to make permanent the lower tax rates passed in 2001 and 2003, making it seem more likely that it will allow higher taxes in order to help meet the country’s obligations.
If you don’t know how you would react to these or other unexpected developments, it might be time to evaluate whether your long-term strategy is underestimating the potential effects of taxes, inflation, and medical costs. A review could help determine whether you are still contributing enough money to meet your goals, whether your risk level is appropriate, and whether your asset allocation needs to be adjusted.
Obviously, there’s no way to forecast the future. The best approach may be to slightly overestimate what it will take to achieve the retirement of your dreams.
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