After decades of careful planning for the day you retire, it's tempting to assume—or hope—that financial management won't loom as large in the future. But whether you are about to retire or have already done so, the need for financial planning remains critical.

If you retire in your early 60s, you can reasonably expect to live another 25 to 30 years. Therefore, the challenge after retirement is to stretch your assets over a time period that may be half as long as your working career. By addressing some key concerns now and periodically monitoring your financial situation, you should be in a better position to enjoy your retirement.

Among the major financial concerns are inflation, health care costs, managing retirement plan assets, the role of Social Security, and the tax consequences of postretirement employment. The following sections touch on these areas and suggest some possible responses.

Inflation and the Purchasing Power of One Dollar Average Annual Rate of Inflation Years 3% 4% 5% 0 $1.00 $1.00 $1.00 5 $0.86 $0.82 $0.78 15 $0.64 $0.55 $0.48 25 $0.48 $0.38 $0.30

Inflation
Increases in living costs can erode your purchasing power and, thus, your standard of living. As shown in the table above, even a 3% rate of inflation can cut the value of a dollar in half in 25 years.

To offset inflation, your income must rise each year. Assuming you don't go back to work, this income must come from a pool of assets that is also growing, or from a pool that is large enough initially to furnish what you need without being depleted too soon.

Individuals nearing or in retirement are understandably inclined to reduce their investment risk by placing more emphasis on income and principal stability than on capital appreciation. It's important to realize, however, that relying principally or solely on such conservative investments as government bonds, bank CDs, money market funds, or Treasury bills may seem safe but could expose your nest egg to erosion from inflation.* Taxes also take a toll.

Action. Just as you do during your working years, in your retirement years you need to maintain a diversified portfolio to meet your basic needs for safety, liquidity, current income for living expenses, and capital growth. How much you allocate to each objective depends on your individual needs and the presence or absence of other sources of income.

Common stocks represent more risk than other financial assets but have historically provided higher long-term returns and a greater margin over inflation than other investments.

* Unlike bank products, an investment in money market mutual funds is not insured or guaranteed by the FDIC or any other government agency. Although they seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market funds.

Health Care Contingencies
Health and custodial care costs are among the most pressing expenses and can be expected to consume at least 10% of your postretirement income. Moreover, individuals are being asked to bear more of the burden of medical costs. Budgetary pressures and rising costs are forcing Medicare to increase the share paid by participants, and corporations are reassessing and often cutting back their health insurance programs for current and future retirees.

Action. Become familiar with what Medicare provides. Since Medicare typically covers less than half of participants' health care costs, you will probably need additional insurance. If you are not covered by your former employer's insurance plan, see if you can participate by paying your own way. Also investigate Medigap insurance to supplement Medicare.

Unfortunately, few, if any, government or corporate health plans cover lengthy nursing home stays or home care. Numerous companies offer such policies, however, so it pays to shop around.

Structuring Retirement Plan Distributions
Since a significant share of your retirement income will probably come from employer pension plans and your own IRAs (or other retirement plans), you need to be familiar with the rules and tax considerations concerning withdrawals, especially if you expect to receive any lump-sum distributions.

Action. When it comes to taking money out of your IRA or Keogh accounts, you need to follow several IRS rules and regulations or risk losing some of your savings to federal tax penalties. Rules address the amount and timing of your withdrawals, and many are based on your life expectancy.

Lump-sum distributions present a range of choices with significant tax implications. To determine the best course of action, you need to consider the amount of the distribution, how soon you need the money, other resources available to you, your age, your health, and your anticipated investment return.

Social Security
Social Security replaces only a portion of your preretirement income, so you need to be familiar with the various benefit levels and tax regulations affecting them. Full benefits reflect how long you worked, how much you earned, and your age at retirement. Benefits are reduced permanently if you begin receiving them as soon as you are eligible but are increased if you postpone applying for them. Keep in mind that benefits rise with inflation but may be partly taxable.

Action. If you are nearing retirement, you should obtain a precise estimate of your expected benefits by calling the Social Security Administration (1-800-772-1213) and requesting Form SSA 7004. When you decide to begin receiving benefits, contact your local SSA office three months in advance of the date you wish them to start. For information concerning taxes and benefits, including the effects of continuing to work after receiving benefits, request Publication 915 from the Internal Revenue Service.

Social Security Administration

Internal Revenue Service

Getting Started
Getting started on a financial plan is the hard part. Most of us are more practiced in the art of procrastination.

Action. Gather all the pieces to the puzzle, including information on your investments, sources of income, health insurance situation, anticipated major expenses, and so on. Then see if your assets are invested in the best way to meet your current needs and your longer-term objectives during retirement.

Learn more about T. Rowe Price Associates, Inc.