The following sections touch on these areas and suggest some possible responses. 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.
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 provided higher long-term returns and a greater margin over inflation than other investments. 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.