Rebecca Meares, CFP®, AWMA®, & Justin Caudle, CFP®, AWMA®
A carefully planned retirement can be derailed due to an untimely death, a stock market crash, and a variety of other unforeseen events.
While it is impossible to control the market or predict what curveballs life may throw your way, you can prepare for some of the more common retirement risks to put your mind at ease.
Don’t get blindsided! Have a plan in place to combat these five retirement risks and you’ll be on your way to retirement success.
Outliving your money
Thanks to improvements in science, health, and technology, Americans are living longer than ever. According to the Social Security Administration, a man turning 65 today can expect to live until age 84 on average, and a woman until age 86. One in four will live past age 90, and one in 10, past 95.
A longer life could mean a longer retirement. Are you prepared to fund a 30+ year retirement? The reality is that most Americans are not.
What can you do to be sure you won’t outlive your money? Consider extending work, delaying Social Security for a higher payout, or saving more today. The financial implications of underestimating your retirement years could be devastating.
Inflation is a hidden enemy that causes your retirement dollars to lose value over time. While not as dramatic as a market crash, inflation can be just as dangerous to your nest egg as it slowly eats away at your purchasing power. Although inflation has been relatively low, even a modest 3% would cause the value of your $1,000,000 portfolio to be cut in half in about 23 years – that means your million-dollar nest egg could only buy what $500,000 could get you today. With retirements lasting longer than ever before, and retirees generally being invested in more conservative portfolios, the exposure to inflation risk in retirement could be monumental.
So how do you keep up with the rising cost of living? Consider the overall constitution of your portfolio and what kind of investments may help you outpace inflation. Consult your advisor to determine how much you need to allocate to stocks or stock funds. Consider investing in alternative asset classes – like commodities or real estate – that tend to rise along with inflation. Most importantly, start planning today! Find out if your pension is adjusted for inflation, determine if it makes sense to delay Social Security to get a higher benefit, and be aware of your retirement lifestyle and expenses so inflation doesn’t sneak up on you.
Unforeseen Medical Costs
It’s no surprise that healthcare costs are the number one concern of the Baby Boomer generation. According to a recent Vanguard study, a 65-year old female in average health is expected to pay $5,200/year for retirement healthcare. An 85-year old female in average health would pay about $10,100/year. And these costs are increasing at a dramatic rate.
Medicare is a primary component of many retirees’ health plans, yet it can be challenging to navigate the alphabet soup of Medicare plan options. Factors like health status, geography, and income must be considered when choosing a plan that is right for you.
Additionally, when it comes to Medicare, timing is critical – make sure you understand your window to enroll to avoid potentially lifelong penalties.
Also, don’t forget about the possible need for long- term healthcare if you have a chronic illness or require assistance with things like bathing or eating independently. This type of care can set you back hundreds of thousands of dollars.
Talk to a financial planner and educate yourself on the options you have to hedge against expensive medical care. Underestimated healthcare costs can completely destroy an otherwise thoughtful retirement plan.
Imagine you are on the cusp of living out your dream retirement. Everything is coming together – you’ve picked a date to give your two weeks’ notice, decided where you will live, and what country club you will join. A few of your friends beat you there and are living their best life. Now imagine your portfolio declines by 10, 20, or even 30%. How would this impact you? Would it push back or destroy your retirement vision? How would this impact your friends who have already retired? Would they need to try to find work to supplement their income? This was the reality for many during the financial crisis – we in the industry know because they sought our help after the fact – and of course, there wasn’t much that could be done. This doesn’t have to be you. Whether retirement is in your sights or you are already sipping cocktails on the beach, you can protect yourself from some, if not all, of this risk.
One sound strategy you have is to beef up your cash position. In a low interest rate environment, it is easy to forget that cash is an important part of an overall portfolio. It is wise to have enough cash to be able to ride out a market downturn without having to touch your stock/bond portfolio.
Depleting your portfolio
Ask yourself this, how much money can I confidently withdraw from my portfolio every year without running a high risk of depleting it prematurely? The old school of thought was 4% per year, if retiring at age 65. In other words, if you have a $1,000,000 portfolio, $40,000 (before taxes) per year is what would have been a recommended withdrawal amount. But times have changed, and due to historically low interest rates, the recommended withdrawal rate has decreased to 2.8% for the most conservative of investors. These are just rules of thumb, however, and your safe withdrawal rate may be very different.
How can you determine where you stand? It is important to run a projection of your retirement cash flows, determine your sources of income, and understand that flexibility is key. You should think about where your income will come from, how you will handle withdrawals during down markets, and if you will be adjusting for inflation every year.
It is important to understand that although there are a variety of risks that can impact your ideal retirement, there are proactive measures you can take to dampen or eliminate their impact. We suggest thinking through these scenarios and developing a plan of action as to how you will handle these risks BEFORE they occur. You can also seek out the help of a qualified CERTIFIED FINANCIAL PLANNER™ who can run simulations and help you make informed decisions. Remember, it’s easier and more effective to take preventive steps now than corrective steps later!
The Caudle Meares Group at McAdam has one simple mission: to help their clients achieve financial confidence through expert advice and authentic relationships. The team champions their roles as fiduciaries as they design thoughtful plans to help their clients retire and stay retired. Come by and say hello if you attend the DC Ideal Living Show.