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Learning How to Make Solid Retirement Choices

Philip Moeller

The purpose of a retirement plan is to live the good life, or at least as much of one as you can. The goals are positive--having enough money to enjoy leisure time, travel, meet new people, and learn new things. Successful retirements should include being able to see family members and friends regularly and help them out if they need it. A successful retirement might include estate plans. And most of all, it should include freedom from fear and stress.

These are the things we strive for, and they should be emphasized heavily in our discussions and plans. Too often, however, they're not. Instead, these positive goals are expressed in terms of our fears should we not achieve them. The language of retirement turns negative. We worry about making poor investment choices, outliving our money, devastating illnesses, healthcare expenses, and being a burden on our families.

This negative spin owes much to the belief in marketing circles that vinegar is often more effective than honey in motivating people to do unpleasant things. And while the goal of retirement planning is positive, the ways we meet that goal often are not. Living for tomorrow and not just today entails financial compromises and sacrifices. Saving money means curbing current consumption and enjoyment. Buying insurance products to protect ourselves and our families from financial hardship, if not ruin, is not fun. My late parents would smile if they heard me talking about behaving like an adult, because that's what they continually told me to do.

[Read: 10 Great Senior Discounts.]

Behaving like a grown-up, it turns out, is a critical part of planning for and achieving the best life solutions you possibly can. It also means building a realistic profile of the risks and impediments to achieving a successful retirement and then taking steps to guard against those risks.

Whether you acknowledge it or not, you walk around with a very sophisticated risk profile that is uniquely yours. In a nuanced and complex fashion, you are somehow able to evaluate all your lifetime experiences and hopes. This synthesis produces, among other things, a prioritized risk profile of what concerns you the most about living the kind of life you want. It is updated in real time, too, reflecting what happens to you each day of your life.

Financial experts often identify four types of retirement risk:

Investment risk. This includes not only the unknown swings in the market, but also making poor investment choices and relying on bad investment advice.

Inflation risk. Nothing reduces the purchasing power of a retirement nest egg more efficiently or brutally than a prolonged period of inflation.

Longevity risk. A healthy 65-year-old will live roughly 20 more years, on average, and large percentages thus will live 30 more years. Running out of money before the Grim Reaper arrives is a very grim prospect indeed.

Healthcare risk. Healthcare expenses are the biggest financial wildcard of retirement. Likewise, declining health is the biggest quality-of-life risk faced by aging Americans.

I'd add two other big retirement risks to this list:

Death of a spouse. Even if two people really can live as cheaply as one (doubtful), one person can't pay all the household bills if her spouse dies and thereby causes Social Security and pension income to drop sharply.

[Read: How to Improve Your Finances at Every Age.]

Gender. Retirement increasingly has become a women's issue. Women live longer than men and thus need retirement assets to last longer. But today's senior women often did not work or, if they did, they earned much smaller salaries than men. That means their Social Security and pension incomes are also smaller, and that they often face financial hardship when their husbands die.

You may think insurance is, on its best day, a necessary evil. Say what you will, there are loads of solid reasons why we have insurance. When it comes to protecting yourself from retirement risks, what you're really doing is figuring out a way to insure yourself from these potential problems.

The first step in the process is to build your own risk "pyramid" of things you need to protect yourself from on your way to a successful retirement. In addition to the six listed here, you might have others. If you have a disabled child or loved one, for example, their current and future needs may move them right to the top of your risk pyramid.

Once you've prioritized the items on your risk pyramid, you should figure out what you are able to do to protect yourself against these risks. In the investment sphere, for example, you might build a diversified portfolio containing a mix of investments whose collective performance risks mirror your own profile.

[Read: 50 Smart Money Moves.]

Or you might decide it's too risky to count on nest-egg earnings to fund your retirement. In this case, and assuming you have enough money, you should seriously consider a retirement plan where your necessary retirement expenses are all funded by Social Security, pensions, and income from guaranteed annuities.

The wealthy can afford to self-insure against catastrophic healthcare expenses. People with little wealth are forced to rely on Medicaid. Others who can afford it may consider private long-term care insurance, and might also explore newer "hybrid" products that cover the costs of extended care but guarantee a death benefit to people who are fortunate enough to avoid extended healthcare needs.

For couples, I heartily recommend mutual spousal protection. Both spouses should have long-term care policies. Both should also have life insurance that should continue well into their 80s and until death if whole life policies are involved. Consider joint survivorship annuities on private pensions. The monthly payments are smaller than unrestricted pensions, but they will last as long as either spouse is alive.

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