Part of my job as a Wealth Management Advisor and a Retirement Income Certified Professional (RICP) on the Rockdale Financial Services team is to help clients anticipate risks in retirement. We all know some of these risks, but you may not know others.
Understanding these risks and looking for ways to mitigate those risks will undoubtedly make you feel more confident in retirement.
Here are some risks to consider.
- LONGEVITY RISK
No one can predict how long they will live. This complicates planning since a retiree has to secure an adequate stream of income for an unpredictable length of time. You may build your plan expecting to live to age 82 and then it turns out that you live to 92. How are you going to make your money last an additional 10 years?
- INFLATION RISK
When working, inflation is often offset by an increased salary. In retirement, inflation simply reduces the purchasing power of your income. As goods and services increase in price, it will impede your ability to maintain the standard of living you desire.
- EXCESS WITHDRAWAL RISK
When taking withdrawals from a portfolio during retirement to fund income needs, there is a risk that the rate of withdrawals will deplete the portfolio before the end of retirement. For example: If Bob and Sue needed $5,000 a month to live when they retired at age 62 in 1981. They may need $12,373 per month in 2011 to maintain the same purchasing power. You may estimate that stocks have historically earned an average of 8% a year, so you assume that you can afford to withdraw 6-8% of the initial portfolio value while in reality to protect against the uncertainty of the market you may have to limit withdrawals to 4% or less.
- Sequence of Return Risk
If you assume that your average return will provide you with the income you may not be factoring in a significant downturn in the markets. Withdrawals from investments during downturns in the market will capitalize losses. Therefore, you will never have the opportunity for withdrawn funds to recover. This may accelerate erosion of your capital. As I always say, losses in portfolios have a much greater impact than gains.
- LONG-TERM CARE RISK
Chronic diseases, orthopedic problems, and Alzheimer’s can restrict a person from performing the activities of daily living, which will require financial resources for custodial and medical care. Because of physical or mental infirmities, you need help with basic activities. To get help, you may need to move to assisted living, a nursing home, or go to adult day care. Even if a family member can provide care, it might be a real financial burden for them, especially if they have to cut back on work.
- REEMPLOYMENT RISK
Many retirees plan on working in retirement. Reemployment risk is the inability to supplement retirement income with employment due to tight job markets, poor health, and/or caregiving responsibilities.
- EMPLOYER INSOLVENCY RISK
Employer-provided retirement benefits are an important part of retirement security for many. If the employer has financial problems, employees may lose their jobs and in some cases their benefits.
- LOSS OF SPOUSE RISK
The loss of a spouse is a major personal loss, but without planning it can also result in a decline in economic security.
9.UNEXPECTED FINANCIAL RESPONSIBILITY RISK
Many retirees have additional unanticipated expenses during retirement, in many cases due to family relationships and obligations. For example, an adult child, a single mother, loses her job and needs assistance. You decide to pay your daughter’s mortgage until she gets back on her feet. You do not want to be in the position to help your children early in retirement only to become a financial burden to your children later in retirement.
Also known as point-in-time risk, timing risk considers the variations in sequences of actual events that can have a significant impact on retirement security. There are just some factors outside of your control. Depending upon when you retire, you may, for example, face high inflation or low interest rates when you retire.
11.Public Policy Risk
- An unanticipated change in government policy regarding tax laws and government programs such as Medicare and/or Social Security can have a negative impact on retirement security. For example, Medicare costs are based on income. The more you make the higher your Medicare premiums are. This is something that has changed over the years from a fixed rate for everyone.
For example, you have saved diligently for retirement only to find the government has adopted “means testing” and you are no longer eligible for certain programs because your income is too high. With a 32 trillion-dollar government debt, as of this writing, we may be looking at higher tax rates and/or reductions in other government programs.
At Rockdale our team of professionals are ready to help you or someone you may know navigate these retirement risks.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.