Knowing what risk is doesn't eliminate it. Each retiree needs a plan to manage the risks that are ahead of them. How is this done?
- Evaluate the risks before you. Look back over Part 2 in this series to review the different kinds of risks retirees face.
- What are your expectations for taxes in the future? For inflation?
- How is your health? Do you have hopes for an extended life expectancy?
- Will you suffer financial loss at the death of a spouse?
- Are you able to continue to earn any income?
- Eliminating all risk will not be possible. Which ones have the most potential to negatively impact your plan? Which ones are going to keep you awake at night? Review Part 1 of this series on Risk Capacity and Risk Tolerance. Rank them in order of priority so that you can begin to work on your risk plan. Trying to deal with all of them at once can be overwhelming. Successful retirees have typically worked on their retirement plan in phases.
- Begin to develop a plan for each risk area, starting with the top priority risk. At this stage, you may be tempted to ditch your spouse for a wealthier alternative. And I won't tell her that you also thought, "The devil you know is better than the devil you don't know." You're not Larry King or Liz Taylor...stick with what you got!
- Is your portfolio set up to navigate sequence of returns risk? And are you likely to be compensated (receive returns) for the risk you are taking?
- Do you have tax class diversification to handle the rising and falling of tax rates? You have time to reposition assets to create more balance.
- Do you have product diversification or are you stock market dependent? Risk based products like investment portfolios have the potential for excess returns but also excess losses. Promise based products like cash value life insurance and annuities can form a level of security to buffer the ups and downs of the market that are sure to come.
- Do you have a plan to hedge inflation risk? Stock market investments can but do so at the introduction of investment risk. TIPS, inflation adjusted annuities and other products can also help offset the eroding power of inflation?
- If health care and long term care costs concern you (and they probably should!), do you plan to self insure or will you purchase protection? There are various options available to transfer this risk to an insurance company.
- What happens if you live to 105? Does your current plan fall apart if you live beyond life expectancy? Does that mean you work longer? Spend less? Go all Thelma and Louise when you run out (please don't)? Remember...longevity is the risk multiplier that makes most other risks more impactful. This may be the single biggest risk to deal with.
- Should you work more years?
- Should you pay off your house before you retire?
- Should you consider a reverse mortgage?
- As you can imagine...this is just a taste of the questions that need to be asked in a proper risk management plan for a retiree.
- Keep working on it. After you have handled the risks that you were worried about, the work isn't done. Life is not linear and risks change over time. Inflation risk is low in 2020, but it might be really high by 2025. There are $25 trillion worth of reasons that tax rates might go up in the future. Income tax rates are historically on the low side now, but that can change. A good retirement plan is written in pencil with a big eraser. You must be able to pivot to make changes to the environment that you are in at the time.
In the words of a great philosopher, "if you choose not to decide, you still have made a choice." Retirement planning does not take care of itself. Retirement planning is not set it and forget it. When you yearn for that day when you ride into work with the windows down, blasting "Take this Job and Shove It", and you imagine the bliss that will be your retirement, just remember that you are ultimately responsible for keeping that bliss! An investment of time now will reap rewards of more certainty later. Retire well!
*Guardian nor its subsidiaries issue nor advise for reverse mortgages.