There are a number of risks that nearly everyone will face in their later years. Whether you are just starting to think about retirement or already retired, fully understanding these risks and developing a comprehensive strategy to safeguard against them is essential to enjoying a comfortable retirement.
While it is true that you will receive benefits from programs like Social Security and Medicare to help cover your retirement expenses, the remainder of your retirement income will most likely be drawn from assets that have taken many years to accumulate. To be sure that your portfolio will last throughout your retirement years, you will need to protect against the following: 1) Inflation Risk; 2) Market Risk; 3) Longevity Risk; 4) and Health Risk.
Of course, no one has a crystal ball, and none of these risks can ever be quantified exactly. No one knows how the economy and the stock market will perform in the future, how healthy they will be in their later years or how long they are going to live. However, this is not an excuse for inaction. There are a number of steps that you can take to reasonably protect your sources of retirement income. Just be sure to take enough time to address each risk thoroughly. Your decisions will ultimately have a lasting impact upon your standard of living and quality of life.
Inflation
Even a modest rate of inflation will have a large impact upon future purchasing power. For example, at an inflation rate of 3%, a retiree would need twice as much after-tax income 24 years later to maintain the same standard of living. Compounding this problem is the glaring fact that health care costs continue to rise at a rate greater than the overall inflation rate—something which impacts seniors more than any other age group.
Market Risk
Traditionally, financial advisors recommended a very conservative approach when constructing a retirement portfolio. The emphasis used to be on avoiding the volatility of the stock market and was primarily concentrated on fixed-income investments. With retirees on average living considerably longer than before, this approach may no longer be the prudent one. Therefore, it is wise to consider allocating at least some of your retirement assets into common stocks as a hedge against the threat of inflation. This being said, it is wise to diversify one’s investments so that no one stock or industry group represents a disproportionate percentage of one’s portfolio. Shifting a percentage of your portfolio into various asset classes (e.g., common stocks, corporate bonds, etc.) is known as “asset allocation.” Deciding precisely which allocation is best for your portfolio depends upon your personal investment goals and risk tolerance. Because this is a complex process, it is highly recommended that you first consult with an experienced financial advisor.
Longevity: Not Planning for a Long Retirement
Whether or not your money will last through retirement will depend largely upon the amount you intend you withdraw on a regular basis. What might appear to be a relatively small increase in your rate of withdrawal can significantly decrease the number of years that your retirement income will last. For example, a portfolio of $1,000,000 with a 4% annual withdrawal rate could provide 6 more years of retirement income than would a 5% annual withdrawal rate.
You should also bear in mind that with life expectancies continually increasing, there is a strong possibility that you or your spouse may spend almost as many years in retirement as you did working. Be careful as not to look merely at “life expectancies.” Remember, 50% of the population lives beyond those magic numbers that you see in mortality tables. In fact, if you’re a non-smoking couple age 65, there is a 50% probability that one of you will live to age 92. Therefore, it is important to see to it that your essential needs are satisfied by a guaranteed income for life.
Health Care Expenses
No one knows how well their health will hold up during retirement. In fact, chances are increasingly likely that someone turning 65 will someday be admitted to a nursing home. Full-service nursing home care is expensive and often reaches over $100,000 a year. That’s why it’s very important to consider other ways to cover these unpredictable expenses, such as a long-term care and/or a Medigap policy.
Glenn R. Swift has been working as a financial advisor for over thirty years. If you are interested in a complimentary consultation, feel free to call (772) 323-6925 or e-mail glenn@glennswift.com him at your convenience.