Planning for retirement is like building a house out of playing cards: With the right planning and a skilled hand, you will have a lovely place to spend your golden years. Unfortunately, it doesn't take more than a bump of the table to send the whole thing tumbling down. Here are five common retirement risks retirees should be aware of:
Market Crash
Since 2008, market risk is often the first thing that comes to mind when we think about retirement threats. When the market crashed, many people lost over half of their retirement savings. Most of them have only broken even this year. That means for nine years, their rate of return was at zero.
Tax Hikes
When clients come into my office, I’ll often ask if they believe taxes will go up in the future. Ninety-five percent of them say yes. From my experience, this 95% is right. When planning for retirement, it’s necessary to devise strategies that will lessen your tax burden in the future. For example, a Roth IRA can help you potentially pay taxes at a lower level, then enjoy the tax-free income later.
Inflation
In addition to asking my clients their predictions about taxes, I have two other important questions: “What did you pay for your first house?” and “What did you pay for your last car?” More often than not, they paid more for their most recent car than their first home. InflationData.com has determined that long-term inflation rates average 3.18%. This may sound small, but if your $200,000 CD is getting 3.18%, you’re actually losing $4,000 a year in buying power! You can’t plan for the costs of today when you’re going to be paying for the costs of 10 years from now.
Longevity
People are living longer. One out of every 10 people over the age of 65 today is expected to live past the age of 95.1 It should go without saying that the longer you live, the more money you will need to sustain your lifestyle. Remembering this during retirement planning is especially important for women. Because women tend to live longer than men, they’re more likely to outlive their spouses, and they may have to survive on one income at the end of their lives.
Health Care Costs
Health care inflation is three times higher than other forms of inflation, and the costs of elder care have officially surpassed the costs of child care. This isn’t likely to change anytime soon. For the most part, we’ll only face more health care costs as we age. Then you also have to take into account the possibility of paying for a loved one’s health care, if needed. When planning for retirement, dedicating a portion of your plan to covering health care costs shouldn't be optional. A good retirement strategy will have you balance the risks you face, but it’s not always easy. If you lower the risks you face in the market, you may end up struggling with the costs of inflation later. This is why you want to have a knowledgable advisor on your side who can look at your goals and help manage these risks. There are many threats to your future waiting to ruin your retirement plan. What are you doing to protect it?
Avoiding the Risks
Growth planning, or the accumulation phase of your life, is different than retirement planning, which you’ll need in the distribution phase of life. The strategies you used in your 30s and 40s won’t cut it when you’re less than 10 years from retirement — a phase I call the red zone. In the red zone, a bear market is more than just a challenge to overcome. If you aren’t prepared, a downturn in the market can devastate your retirement prospects and keep you in the workforce decades longer than you intended. To protect themselves from a bear market, retirees and those close to retirement must adopt a new mindset, one that prioritizes preservation over growth. Meet with your financial professional and get an income strategy going. Look at what you’ll need to enjoy your lifestyle throughout retirement and factor in any health or unexpected expenses that could arise later in life. You want strategies that provide a fixed income you will never outlive. This will require taking on less risk, shifting your portfolio, and perhaps even looking into annuities.
I have seen many clients struggle to adopt a new mindset regarding their finances. We often get used to doing things a certain way, and anything different can seem wrong or dangerous. But what’s more dangerous is leaving your finances unprotected. It can take years for some clients to fully switch gears; during that time, they put themselves at the mercy of the market. Let’s say you have plans to retire next year, and the S&P 500 drops 56% tomorrow, like it did in 2008.2 What would that do to your portfolio? Would you still be able to retire next year? Or even in the next five years?
If you find switching gears into the preservation mindset challenging, I recommend you meet with your independent fiduciary and write down your income plan together. Ask any questions you need to be answered, so you fully understand how the plan works and how it benefits you. I’ve found that when someone in the red zone understands their income plan, they feel more confident about changing to something new.
1 Social Security Administration.
2 Manda, K. “Stock Market Volatility During the 2008 Financial Crisis.” The Leonard N. Stern School of Business. 1 April 2010.
Insurance products and a broad array of other financial products are offered through Diversified Estate Solutions, Richard A. Parkes, NC Insurance License #2413889. DT433606-0219.
