What are the risks of retirement and how do we plan for them? In recent articles, we’ve written a lot about retirement and different aspects of planning for it. Often risks are specific to your particular retirement plan, but several are common in all plans. Even after you transition into retirement, it’s still vital to periodically assess your risks. Kick the tires on your retirement plan every now and then to see if you need to make changes. Here are the top four risks we see when preparing and living in retirement:
1) Longevity: How long will my money last?
One of the most important questions to consider is how long your money will last. Although it’s impossible to know how long you will live (national averages say about 78 years), it always best to plan and hope for an extremely long life. Your nest egg must not only be able to provide income for the duration of your retirement, but it needs to be resilient enough to weather all types of economic climate and risks.
This is the most important risk because the consequences of a mistake can be dire. If you run out of money at 82 years old, what then? Going back to work probably doesn’t sound fun. Moving in with your family may not sound that appealing either, so better to plan for having too much than not enough.
Longevity risk can be offset in a few different ways. Building dependable income streams that will pay enough to cover essential expenses now and in the future is always a good rule. Social Security and employer-sponsored pensions can help, but often those can’t cover essentials by themselves.
Also, a growing percentage of retirees simply don’t have a company pension. Building an additional lifetime income source through an immediate or income annuity can provide indefinite income during retirement and is appropriate at times. Just beware of the product restrictions and the associated costs.
2) Lifestyle: Fore!
You are not the same person you were 25 years ago. Similarly, you won’t be the same person during your retirement, either. Ask yourself these important questions. What do you want your retirement to look like? Will you be traveling a great deal? What hobbies will dominate your time? Do you want to enjoy two homes? Will you be relocating? Downsizing? Do you want to leave anything behind to future generations? These are questions that you may often wrestle with at night, and they don’t necessarily go away after you retire. You need a realistic income plan to address them.
In addition to extra travel or greens fees, family situations can change as well. Divorce, kids returning home, or even death of spouse can dramatically affect your lifestyle during retirement. Keep these potential scenarios in mind as you prepare to leave the workforce.
3) Health: 70 is the new 50.
Another important concern during retirement is health: hospitalization, doctor visits, prescriptions, and even long-term care. Medicare covers some of these expenses, but not all. The Center of Retirement Research estimates a 65-year old couple retiring in 2010 will need $206,000 to cover medical expenses during retirement – not including assisted living. A couple planning on retiring in 2040 would need almost $500,000.
Health risks are very real, especially during retirement. It’s imperative that you prepare for health care during retirement, even if you have Medicare. There are many different outlets that can provide information related to long-term care insurance. Check out Should Boomers Save for Healthcare? for more information about normal health expenses.
4) Inflation: A stamp was once 10 cents?
One of the biggest risks during retirement is inflation. Business Week called it the ‘portfolio killer’. Although we are presently in a rare period of deflation, more often inflation eats away at your nest egg like a perennial worm. Your portfolio needs to beat not only the average 3% inflation, but also consider taxes and rising costs in things like health care which generally grow faster than 3%. Plus, your portfolio still needs to grow. You don’t want your nest egg to shrink faster than your rate of withdrawal.
Conservative investors can fight against inflation by considering Treasury-Inflation Protected Securities, or TIPS. These federal government bonds are guaranteed to keep pace with the government -calculated Consumer Price Index. Although they’re not always a great solution prior to retirement, TIPS may work for a portion of some portfolios during retirement, but shouldn’t be the only thing in your portfolio.
Retirement should be a great time in one’s life, but is not without risks. Make sure you’re calculating these before turning in your resignation. It’s always a good idea to prepare for these risks by consulting a professional who can take an objective view of your plan. Wise counsel can help bring peace of mind to your golden years. After all, these are the years that should be the most carefree of your adult life. Good luck.