Unemployment Figures Remind Us to Safeguard Our Retirement Income06-05-2014 |
The good news is that recent unemployment figures show the U.S. labor market is gaining steam. At the beginning of May, the number of people filing for unemployment benefits fell to its lowest level in seven years. Just a few weeks ago, the number of Americans receiving benefits also fell to 2.65 million, the fewest since December 2007 when the Great Recession began.
But the bad news is that the percentage of working-age Americans who do not have a job is alarmingly high. The so-called labor force participation rate is around 60%. On the CalculatedRisk blog, Bill McBride recently explained Goldman Sachs’ take on the reasons why this is so.
This reminds us that at some point in our working life, we will all need to think about turning our pay coming in into money going out to fund our retirement. In other words, we’ll have to go from accumulating our savings to distributing it to ourselves and our family.
Here are three things to think about when you plan for shifting from income accumulation to distribution:
Live long and prosper: Your retirement plan needs to assume that you’ll live a long life. Keep in mind that if you are in a part of a couple, at age 62 there is a 47-percent probability that at least one of you will live to age 90 or more. Make sure you consider all of these options:
- Look at long-term fixed income investments with a low default rate.
- Work as long as possible to maximize your Social Security benefits.
- Explore income oriented investment strategies that will turn accumulated assets into a steady income stream.
Be a fussbudget: One of the keys to maintaining your retirement income for life is putting yourself on a budget. This means thinking hard about how much of your retirement savings you can draw down each year. A general rule of thumb is to set an annual withdrawal rate between 3% and 5%. But recent thinking has evolved to where a retiree should deliberate on being flexible when it comes to drawdowns. (Darla Mercado of Investment News explains some of that thinking here.) This is certainly worth discussing with your financial advisor.
Inflation frustration: Over the past few years, overall inflation rates in the U.S. have remained low. But keep in mind that prices have been rising in some sectors, like healthcare. (As USA Today’s Paul Davidson reports, U.S. healthcare spending growth recently reached a 10-year high.) During your retirement, inflation can eat away at your spending power over time. Keeping your nest egg safe is paramount. But don’t neglect investments that also have growth potential to help offset the negative effects of rising prices.