Did you know that 70% of Americans fear outliving their money in retirement more than death itself?(1) You may not think about it while you’re working and getting a paycheck, but things will change fast when you have to survive on your own.
There are some big risks you should be planning for that could make you run out of money in retirement…
Longevity risk means outliving your assets. If this happens, you’ll have to change your standard of living, reduce your level of care, and possibly even go back to work. According to recent statistics, the average American who reaches age 65 has a 1 in 4 chance of having to make it through 30 or more years of retirement.(2) The best way to plan for longevity risk is to make sure you have a large retirement nest egg that will provide sufficient income at a safe withdrawal rate. You can also minimize longevity risk by taking steps to maximize your Social Security benefits.
Market risk refers to the possibility of investment losses. However, you can minimize market risk in a few different ways. Most importantly, you'll want to maintain an appropriate asset allocation and not invest too much of your nest egg in stocks. You can also minimize market risk by making sure you have a sound investment strategy with a diversified portfolio.**
Inflation can shrink a fixed income in retirement. Social Security benefits are adjusted to account for inflation, but many annuity payments and other payments are not, so it's important to incorporate inflation in your planning for retirement. No one really knows what the rate of inflation will be in future years, so it's reasonable to assume the annual average of 3% (calculate for 4% if you want to be conservative). If you're earning less than the inflation rate from your investments then you're losing ground and your investment's purchasing power over time is shrinking, not growing. If you're averaging 8% annual growth, understand that it may be more like 5% with inflation factored in.
Health risk refers to unexpected and costly health problems. The best way to mitigate this risk is to get regular preventative care, take steps to stay healthy such as exercising and eating right, and including healthcare spending when setting retirement savings goals. If you can save in a health savings account or have a dedicated investment account for healthcare costs, you should be well prepared. But if you've already reached retirement without funds set aside for medical services, make sure to shop carefully for insurance during the Medicare open enrollment to find the policy best suited to your needs.
Family risk refers to the unforeseen needs of family members. Seniors could, for example, find themselves serving as the caregiver for a sick spouse, or providing financial support to adult children. Planning for this risk is difficult and usually involves having tough conversations with loved ones about what you can and are willing to do so that you don't jeopardize your own retirement security.
Policy risk refers to the possibility of retirement benefit cuts. The best way to minimize this risk is to make sure you aren't reliant on government benefits. Try to make sure you can live on your savings alone. That way, any money you get from Social Security will just provide extra income, and your financial security won't be reliant on politicians doing the right thing.
These are important risks to consider when planning how much savings you’ll need to get you through your retirement comfortably. However, you can minimize the potential threats to your financial security by taking a few simple steps.
Unfortunately, most people nearing retirement don’t consult a financial advisor, and only about half try to calculate how much money they’ll need to retire comfortably, according to surveys by the Employee Benefit Research Institute. Instead, retirees typically do one of two things:
- They try to minimize withdrawals, viewing their retirement savings as an emergency fund that must be conserved, or
- They wing it, using retirement savings as a checking account to pay their current living expenses without much thought for the future.
Taking either of these two approaches is not a good idea. Those who wing-it often burn through their money too fast, while those who try to conserve may spend too little.
Depending on how much money you have saved or invested when you decide to retire, there are several ways to squeeze as much income as possible from your retirement funds:
Planning your finances using a retirement budget can improve your peace of mind and lessen your stress about money in your golden years. More importantly, calculating your budget will help you avoid spending too much of your nest egg too soon.
The “4% Rule”
Traditionally, financial planners have recommended the “4% rule” — withdrawing 4% of retirement savings in the first year and increasing the amount each year by the rate of inflation. The right distribution amount depends on a variety of factors so work with your advisor year to year to adjust to your situation and the market.
Another way to set up a retirement income is to buy an immediate annuity, which offers a stream of payments in exchange for lump sum, from an insurance company.
Social Security is another source of income that can be a solid foundation for most people’s retirements. Benefits increase with inflation, don’t fluctuate with the market and can’t be outlived. Plus, if you can delay claiming benefits until you’re 70, you’ll get the largest possible check.
If you find yourself facing inadequate savings, you may need to supplement your income by tapping your home equity.
By far, the best thing you can do is to have a retirement income plan in place. Partner up with a trusted financial planner to help you craft a retirement income strategy that works for you.
CONTACT US to get started today, so you can make sure you have the security you deserve in retirement.
* The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company.
** A diversified portfolio does not assure a profit or protect against loss in a declining market.