FALL 2011

FINANCIALJOURNEYS
F I N A N C I A L & R E T I R E M E N T P L A N N I N G F O R L I F E

Re-imagining your retirement

Leaving the workaday world is something many people look forward to until the realities of life without a paycheck, colleagues and a place to go every day set in. But with careful planning, retirement can be whatever you want it to be. For example, how does a different relationship with your current employer one with less stress and that centers on what you like about your job sound? Rather than thinking about retirement as an on/off switch,
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Defend yourself!
How to structure an inflation-oriented portfolio
Among the risks that investors in or nearing retirement must deal with is inflation risk, the possibility that rising prices will erode their purchasing power. In this regard, its important to understand that what may seem like a relatively mild inflation rate can pose a significant risk over the long term. For example, if prices were to rise 2.5% a year for the next 30 years, $500,000 in todays dollars would retain less than half ($233,942) of its original buying power at the end of that time. (Note that this calculation doesnt take into account any returns that might be earned on that money during those three decades.) With this in mind, how should you structure your retirement portfolio? The overriding consideration here is asset allocation what percentage of your portfolio to allocate among
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FINANCIAL JOURNEYS

FINANCIAL & RETIREMENT PLANNING FOR LIFE

Re-imagining your retirement

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you may want to explore whether your employer is open to keeping you on board as a consultant or working part time. Employee benefits make up a large part of total payroll expenses, so retaining a knowledgeable, proven worker at a lower overall cost might be very attractive from your employers point of view. When considering this kind of phased approach to retirement, you need to know exactly where you stand in terms of pension benefits, rolling over your 401(k) or other plan, continuing health insurance if youre under the Medicare-qualifying age of 65, and all the other things that go with full-time employment. Be sure

you understand well ahead of time what your financial picture will be when that paycheck goes down and other income sources kick in. Evaluate changes in your expenses under a part-time work scenario, like having to pay higher premiums for healthcare coverage. Once you have a clear picture of your income needs, and how your benefits may change, then approach your boss about working part time or in a consultant role. Of course, you might want to walk away from your employer to do something completely different. Even if thats the case, you still need to know where you stand financially. Keeping some money coming in

during the first phase of retirement has several advantages. For example, the longer you can delay taking your Social Security benefits, the higher they will be. Your benefits increase every year you wait, so if part-time work can help you wait until 68 or even 70, youll be increasing your benefits significantly. In addition, some extra income can provide a welcome cushion until you have a better feel for what your cost of living will be in retirement. Theres no one-size-fits-all approach to retirement, but if you stay flexible and remain open to all the possibilities, theres a good chance this phase of your life will go well.

Plan ahead for healthcare costs

If theres a single factor most likely to derail retirement plans, healthcare costs are probably it. Theres no way to accurately predict what they will be, and although we know healthcare costs are rising, we dont know how much they will increase during our later years. Because of this uncertainty, planning for your future healthcare costs is a critical component of your overall retirement strategy. For most of us, Medicare will be the primary source of healthcare insurance, making it very important to understand how this program and its supplemental parts work. Here are some things you should know: Unless youre already receiving Social Security benefits, you must apply for Medicare at age 65 if youre not working, dont have employer insurance or live abroad. After 65, you must enroll within eight months of stopping work even if you continue to receive COBRA or retiree health benefits from an employer. Medicare takes everyone who qualifies based on making sufficient contributions during their working years your health is not a factor. Medicare is not free. You pay premiums for coverage and copayments for most services. Medicare doesnt cover everything. Although it covers many health services, prescription drugs and medical equipment, there are significant gaps. For example, Medicare generally wont cover vision, hearing and dental care; nursing home care; or medical services received abroad. Medicare doesnt cover your dependents. No one under 65 can get Medicare except those who qualify through disability. There are four parts to Medicare: Part A helps pay for hospital or skilled nursing facility costs,
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FALL 2011

Defend yourself! How to structure an inflation-oriented portfolio

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different asset classes such as stocks, bonds and cash alternatives. Each individuals financial situation is unique and therefore requires a specifically tailored asset allocation strategy. However, investors who are concerned about inflation may want to consider increasing their allocation to stocks but not just any stocks. In inflationary times, investors will generally want to investigate stocks of companies in industries that have pricing power, meaning that consumers need to buy their products even when their prices are increased. Examples of so-called defensive industries include healthcare, consumer staples and food products. Within

these industries, its usually wise to focus on the dominant companies typically large, well-established firms that have proved their ability to do well in a variety of business environments. THE VALUE OF DIVIDENDS Equities are also worth considering for another reason dividends. Many people rely on dividends for income during retirement, and rising dividends can offset to some degree the higher prices associated with inflation. However, its important to remember that stock prices can fluctuate considerably, and that dividend payments can fall as well as rise. Retirees should get expert advice

before increasing their commitment to equities, and on deciding whether to rely on dividends as cash flow or whether to reinvest them. The key point is to weigh the risks of owning stocks against the risks of losing purchasing power to inflation. Another asset class to consider is Treasury Inflation-Protected Securities (TIPS), which pay interest twice a year in amounts that reflect the current inflation rate. While you cant control inflation, a portfolio containing carefully selected stocks and an allocation to TIPS can help mitigate the impact of inflation. Asset allocation does not guarantee a profit nor protect against loss.

HOW TIPS WORK Treasury Inflation-Protected Securities (TIPS) provide protection against inflation by adjusting their principal amount annually based on the Consumer Price Index (CPI) and then paying interest on that new amount. For example, an investor purchasing a $10,000 TIPS bond with a yield of 3% will receive two payments of $150 each or $300 in the first year. However, if the CPI that year is 2%, the principal amount of the TIPS security will rise by 2% to $10,200 and the same 3% yield will be applied in year two, producing payments totaling $306. The principal amount is readjusted every year based on the prior years CPI, meaning it can go down as well as up. When TIPS mature, the investor receives either the current principal value or the original amount invested in the TIPS bond, whichever is higher. TIPS offer the benefit of diversification as well as being a hedge against inflation. Their principal value is guaranteed by the U.S. government and are highly liquid they can be bought or sold before they mature. If sold prior to maturity an investor will receive the current market value, which may be more or less than the amount invested. TIPS will lose value in deflationary periods. They should be held only in nontaxable accounts such as an IRA because increases in the principal amount are considered taxable income in the year they occur even though the principal amount is not actually returned to the holder until maturity.
ADJUST The CPI for the period is determined. The bond principal is adjusted for the CPI.

PAY The new principal is multiplied by the coupon rate. The interest payment is made for the period.

MATURE The process continues until maturity of the bond. At maturity, the investor gets the indexed principal.

FINANCIAL JOURNEYS

FINANCIAL & RETIREMENT PLANNING FOR LIFE

FALL 2011

Plan ahead for healthcare costs

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WHAT IF YOU NEED LONG-TERM CARE?

home healthcare, hospice care and medicines administered to inpatients. Part B helps pay bills for physicians and outpatient services. Part C is a different way of receiving Medicare benefits through private health plans known as Medicare Advantage plans. Part D helps pay the cost of prescription drugs. Be sure to find out what your different premiums, co-pays and out-of-pocket expenses are likely to be. Information also is available at www.medicare.gov.
Although we all want to age gracefully and spend our final years in our own homes, the reality is that nearly two-thirds of Americans over 65 will need long-term care services at some point, according to the U.S. Department of Health and Human Services. Since neither Medicare nor Medigap/ Medicare Supplemental Insurance covers extended nursing home stays, its up to us to prepare for the real possibility that were going to have some significant costs in this area. How significant? In 2009, the median cost of a private room in a nursing home was about $205 a day. A 2010 report from Genworth put the median annual cost of care in a private room in a nursing home at $75,190. With numbers like those, it makes sense to consider long-term care insurance. Premiums for long-term care insurance vary considerably, with your age and overall health the major factors determining the specific costs. The younger you are when you sign up, the lower your premium is likely to be. INVESTIGATE HYBRID POLICIES Of course, theres no way to know how long you might need long-term care, or even if youll need it at all. This last possibility that you wont need it and might therefore waste the premium is a major reason why people dont buy long-term care insurance. If thats a concern, you may want to investigate new hybrid policies that combine features of life insurance and long-term care insurance. With a hybrid policy, if the insured never needs long-term care, then the life insurance portion of the policy provides benefits tax-free to the named beneficiary. Long-term care insurance is a complicated subject. Its wise to talk things over with your financial advisor.

PLANNING TIP:

Construct a disciplined spending policy

Lots of things change in retirement, but controlling expenses becomes more important than ever. While people sometimes assume their living expenses will decline in retirement, that is often not the case, especially if your healthcare costs rise significantly or you plan to pursue new interests. Start by getting a good grip on your baseline living expenses, then figure out how much you can afford to spend on those new interests. To arrive at a spending policy, it helps to categorize expenses into Needs and Wants. Needs are those expenses that are fixed and non-negotiable. Wants are more discretionary meaning you may have to make trade-offs in this category. Your income streams should be set up to meet your needs in a reliable way while also making provisions for your wants. Your advisor can help structure the income from your investments appropriately. Be sure to leave a buffer for unexpected expenses. The key to controlling costs is knowing where your money is going, so be sure to set up a system for recording your expenses accurately. Keep your records current and respond to significant deviations from your plan promptly. Managing your expenses carefully means fewer worries and a more enjoyable retirement.

The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with any other entity listed herein. 2011 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2011 Raymond James Financial Services, Inc., member FINRA/SIPC 10-BDMKT-0467 SFS/CW 8/11 Investment products are: Not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.