Retirement is an exciting time but it can also be unpredictable. No matter how well you plan for your golden years, there will be events and circumstances that could side rail your strategy. Reduce the chance of having to lower your lifestyle standard as you get older by planning for the risks in retirement.
Living Too Long
One of the biggest risks is the “longevity risk,” or that you could outlive your savings. The best-case scenario is that you have to return to work, but if you are unable to work or cannot find a suitable position, you may have to significantly cut your expenses. While downsizing your home may not be too bad, in severe cases, you could see a significant drop in your standard of living in your later years. If it sounds scary, it can be. Address your longevity risk by meeting with a retirement planning professional regularly
Inflation also plays a role in how long your retirement savings will last. Unfortunately, it is also something people often forget to calculate when they create their retirement plans. Keep in mind that you would need $3 to go as far in 2016 as $1 took you in 1981. Now imagine what will happen to the practical value of your retirement savings in 35 years. All of a sudden, your nest egg gets a little smaller, so remember to include inflation as you estimate the cost of living, housing and healthcare.
Many people keep the same investments in retirement that they did while they were still working; they have 401ks, IRAs and stock portfolios. Don’t be that person. While these investments may have served you well in the past, you are in a different situation now. A large drop in your portfolio at or near your retirement could have a significant impact on your retirement income
As you make the move into retirement, you need to have dependable monthly income. One way to do this is to re-position a portion of your assets to a guaranteed annuity or other similar retirement planning product.
Sequence of Returns
Similar to the risk of market performance, is the risk called sequence of returns. This is the risk that the market could perform poorly in the beginning of your retirement, and when the market recovers you have less money in your principle to invest in that current bull market. How the market performs in your first 5 - 10 years could make a significant difference in your investment balance in the middle or end of your retirement.
The reverse could also be true; the stock market could perform really well your first few years in retirement and you could grow an even larger nest egg. Although you would be taking a risk that may not pay off in your later retirement years.
You can't avoid thesequence of returns risk when you are invested in the stock market. The impact could be strenuous when you are in retirement and withdrawing funds from these investments. Guaranteed income products like annuities help you avoid this risk.
Taxes pose a risk in retirement in a number of ways. For one, if you are married and you or your spouse pass away, your tax filing status will change, which could either increase or decrease your tax rates. also, you will generally owe taxes on withdrawals from your qualified retirement accounts. Also, any assets that your heirs inherit may also be subject to taxes. Any one of these could be costly if you don't plan for them adequately, and highlights the importance of talking to retirement income and tax professionals.
Underliving Your Retirement
Did you know that it is possible to spend too little in retirement? Many retirees feel an emotional response to cut spending when they hear on the nightly news how the market has performed that day. As humans, we want to control the world, we can't control the market but we can control our spending habits.
While you won’t run out of money this way, your golden years won’t be very golden. Instead, meet with a retirement planning professional regularly to make sure you are on track. You might find that you can afford to do things that would add to the quality of your life, like visiting grandkids more often, traveling the world or simply accessing better healthcare.