Risks In Retirement

With a significant portion of my client base either retired or approaching retirement, it is appropriate to discuss some of the major risks that retirees face.

Because of the lack of defined benefit pension plans, the stock market poses a serious risk to most retirees.  How to allocate their 401(k) and/or IRA presents a risk, but and even bigger risk is determining a proper withdrawal rate.  Most professional agree that the old 4% withdrawal rate is no longer a sound strategy.

Related, but a potentially greater risk is the sequence of returns.  As I’ve written previously, a down market the first couple of years of retirement can have a disastrous effect on the income the nest egg will generate.

Inflation can also wreak havoc on retirement.  While only minimally present for most of this century, it has once again reared its ugly head.  Not as bad as the ‘70s and early ‘80s, but significant enough to be felt, for sure.

Taxation is another risk that can adversely impact retirement.  Taxes are historically low right now, but with the current $30+ trillion federal debt, most pundits are predicting rates will rise.  If and how that will affect most retirees remains to be seen.

Health is another risk that must be addressed.  Medicare takes care of the basics, but there are deductibles, copays, and overall limits to contend with.  And as most people are aware, Medicare doesn’t pay for custodial care.

But the one risk that amplifies all of these risks is the longevity risk, for the longer your retirement, the more likely it is that it will be impacted by one or more of these risks. 

In other words, if you die three years into retirement, the risks won’t have time to negatively impact you.  But if you have a 25-30 year retirement, it’s almost impossible for one or more of them not to affect you.

What to do?  Well, obviously, purchasing long term care insurance can offset, or at least mitigate, that risk.  Financial experts like Professors Moshe Milevsky and Wade Pfau also suggest allocating a portion of one’s 401(k)/IRA balance to immediate annuities that guarantee an income for life.

These are issues that anyone planning on a comfortable retirement needs to address, preferably before retirement.  If you would like to discuss how this may affect you, please call/text/email.  Thanks for reading.