Entering into retirement can be both exhilarating and frightening. It is the day you have looking forward to for years, yet there is this nagging thought in your brain asking, “Will I be okay?” And it is the right question to ask. Retirement, once elected is hard to reverse. How will you know you are ready? How will you gauge your preparedness? Knowing and understanding the risks associated with retirement is a vital step. If you missed Part 1 of this series you can read it here.
Retirement presents a number of risks that must be navigated to ensure that you can use your time, talents, and treasures to live an intentional and purposeful life. What are these risks and how can you mitigate them? Most of them center around the main concern, “Will I have enough money?” When you can confidently answer with a resounding "YES!", retirement is an entirely different experience. So what are these risks?
1. Stock Market Risk – This is the risk most in our faces. It is on the news every day and might be the most emotionally driven risk factor. And it impacts retirees in multiple ways. Periods of low returns might cause retirees to have to reset expectations. Market losses might change what is available for spending. And every market drop feels like it will never end when it happens.
2. Tax Drag – The impact of taxes mounts as we go through retirement. What happens if you experience times of exceptionally high taxation. Will you be subject to IRMAA? How much of your Social Security will be subject to income tax? How efficient is your investment and spending strategy.
3. Health Care Costs – Medicare, Medigap or Medicare Advantage, Co Pays, Prescriptions, etc. As we age, our health tends to wane…and the costs to care for our health increase. Health care costs have been growing at a rate that exceeds inflation, taking a greater share of the retiree’s wallet.
4. Long Term Care Costs – In addition to health care costs, over half of us will one day need long term care services and the costs can be well into six figures per year based on our geography. This Morningstar study lists many of the stats.
5. DIY Mistakes – What you don’t know CAN hurt you. Bypassing products and strategies, allocation mistakes and other common do-it-yourself mistakes can derail a retirement plan.
6. Loss of a Spouse – The early death of a spouse can cause a loss of income. The lower of the two Social Security payments stops and for those of you with pensions, they can be reduced or stop at the death of the pensioner. And of course, if that spouse was still working, the income would stop.
7. Inflation – Money isn’t worth what it used to be! The eroding power of inflation makes a dollar worth less every year than it was the year before. With just 3% inflation, your purchasing power is cut in half over 24 years…well within the normal retirement planning horizon.
8. Sequence of Returns – It sounds crazy, but the order that stock market returns occur impact the level of success your plan has. Given return sequences are completely out of your control, this is a substantial risk. Portfolio losses early in retirement can be permanently detrimental to long term wealth.
9. Longevity – This is the granddaddy of all risks. It is the multiplier of all of the other risks. If inflation is high and you only life a few years, it probably wasn’t a big deal. But the longer you live, the greater impact high taxes, high inflation, health care costs, etc. have on your income plan. You need a plan to mitigate longevity risk.
Which of these have you planned for? Which ones scare you? What other ones come to mind? A sound retirement plan deals with each. You can have a plan where you can increase your income to deal with inflation, not have to worry about outliving your money, and providing the legacy you desire. In the next article in this series, we will begin to investigate how these risks can be mitigated, managed or even eliminated.
Read the third and final article in this series here.