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There are three primary risks that can really impact your retirement plans. The risks are very real regardless of an individual’s income or net worth. Fortunately, the potential damage from these risks can be avoided if retirees get proactive.
Risk #1 Longevity
The first risk is talked about a lot by economists; the risk of longevity. While there is beauty in living a long fulfilling life, you also need to be able to pay for cost of living during those additional years. Also considering that your annual expenses might increase as you age because people generally need more medical and long-term care services later in life, this can definitely create a financial risk.
Let's consider some data from a recent study produced by the LIMRA Secure Retirement Institute:
One in four men age 65 today are expected to live to age 93 and among women aged 65 today, one in four will live to age 96 or longer. For healthy 65 year olds, you can add 2 to 4 years to general life span. Also, data shows that people with more education or higher lifetime incomes or both tend to live longer than the age group average life expectancy. Now consider married couples…
Married couples must look at their joint life expectancy when planning, and that can be significantly different than a single life expectancy. In a married couple age 65 today, there’s a 75 percent probability at least one spouse will live to age 88 or longer. Age 93 for at least one spouse is a 50 percent probability for the couple, and there’s a 25 percent probability at least one spouse lives to 98.
The simple fact is that you really need an income source that provides you with lifetime guarantees, if you want to maintain financial security during your lifetime.
Risk #2 Inflation
A second risk, which is related to the first, is inflation. It is basic fact that the purchasing power of the dollar declines over time, as cost of goods increase year over year. A retirement income that is sufficient when you start retirement, can begin to stretch thin after 10 to 15 years, and can become completely inadequate when retirement lasts 20 years or longer, if proper measures aren't taken.
The fact is though, and many people don’t anticipate this, that most retirees actually face even higher inflation rates than the Consumer Price Index (CPI), which is the widely used measurement of inflation. This is because retirees are so significantly impacted by rising costs in medical care. Medical services experience a much higher inflation trend than the CPI and typically these account for a large portion of spend from the average retiree’s cost of living budget.
The simple fact is that your savings and income needs to grow at a reasonable rate of return throughout retirement, if you want to maintain financial security during your entire lifetime.
Risk #3 Market Losses
Investment risk is of course the third risk to retirees which impacts their lifelong retirement plans. Many people plan to fund the majority of their retirement spending through IRAs, 401(k)s, and investment accounts. The intent is to rely on income and capital gains earned within those savings accounts to achieve their retirement goals.
In theory, this works well, and retirees will be comfortable as long as they earn the historic average in long-term returns. But their plans would be significantly upset by a severe bear market in the first few years of their retirement; something economists call sequence-of-returns risk. This happened to many individuals on the cusp of retirement in 2000-2002 and again in 2008-2010. Americans found themselves having to rethink retirement plans, work for longer than expected, and ultimately wait for recovery before retirement could even begin.
Additionally, the unfortunate fact is that it doesn’t take a really bad bear market to derail some one’s retirement plan. Many retirees also will have to adjust their plan following an extended period of below-average returns. If your retirement plan is built around market performance, laddering bonds, dividends, or other strategies depending on investment risk- there is volatility in your plan which leaves room for serious, lifelong implications.
The simple fact is that you as a retiree, have reached a phase of life where you should have a portion of your retirement savings in safe environment. An environment where you will earn a reasonable rate of return, but will not risk loss during times of market decline. That is how you ensure that you will not outlive your money.
Contact Summerlin Benefits Consulting Inc. today to learn more about our Safe Retirement strategies.