Retirement Risks
Protecting Your Future Income
The focus of this series is not about how to make your wealth, but rather how to keep it by planning ahead and preparing for the retirement years, that should be some of the best of your life. Future articles will explore various risks in more depth, along with potential solutions.
When people think of risk management, most think of health insurance, workers' compensation, or insuring their home and car, but few consider risk management for their retirement. This is likely because most people don't know it's possible. You'll find no shortage of opinions about retirement risks.
Some say there are three, others claim 20. The truth is, every situation is unique, but there are several risks that apply to nearly everyone.
And let's face it, it's not the small losses we fear. It's the catastrophic ones. But the insurance industry has designed products to address some of the most crucial retirement risks, unknown tax rates, investment losses, timing of investment returns, and longevity.
Is it possible to mitigate retirement risks? Absolutely! No industry has more precise and predictable data than the insurance industry.
Actuaries, (think CPAs of the insurance world) use decades of data to forecast outcomes and set accurate pricing. You pay a fee to transfer the risk of loss to an insurance company. With proper planning, the cost of this protection can be no more than a typical management fee, or even less. And it does all this while still allowing you to leave something to your heirs.
Why this matters now. It's essential to adapt to evolving conditions and consider these risks during each phase of retirement planning to ensure peace of mind and maintain your standard of living. In today's world of volatility and change, building sustainable retirement income is more important than ever. Planning for known and unknown risks is crucial to maintaining your lifestyle throughout retirement. Consumers are increasingly looking for growth with downside protection, because insufficient savings is just one part of the growing retirement income gap. A smart strategy takes all of this into account and helps you stretch your hard-earned savings into a retirement paycheck that lasts. A foundational part of your plan should be making sure your basic expenses are covered. Financial expert Tom Hegna calls this paychecks and play-checks. Paychecks for necessities, Play-checks for travel, hobbies, and spoiling the grandkids.
Volatile markets, low interest rates and longer life expectancies are forcing people to re-evaluate
the ways they save for retirement. It’s important to plan ahead, understand the risks and evaluate
often.
The three phases of financial life. One, accumulation, the saving and growing phase. Two, income distribution. When you start drawing funds. And three, legacy. What's left to pass on after retirement.
During the first two phases, four major risks often appear. A strong retirement plan should address each of them.
Longevity Risk
Not knowing how long you'll live makes it difficult to calculate how much you need to save. The longer you live, the more money you'll need, yet many underestimate their life expectancy. One in three 65 year olds today will live past 90. One in five will live past 95.
Withdrawing three to 4% annually may seem safe until a major market downturn hits. A $2 million dollar portfolio earning 4% yields 80 per year. But if the market drops 25%, you're now working with $1.5 million. Can your expenses adjust that quickly? Most people can't. Taking losses and withdrawals in the same year can devastate future earnings. Old advice withdraw 4% per year. New reality, experts now suggest 2.8% or less. Guaranteed lifetime income solutions can help ensure you won't outlive your savings.
Interest Rate Risk
Low interest rates can quietly erode your financial future. During accumulation, low returns mean you may have to save more or retire later. In the income phase, low yields may force you to adjust your lifestyle or find new incomes. sources. Traditional conservative investments may not generate enough growth to sustain you. A diversified approach is essential.
Sequence of Returns Risk
The order in which you experience market gains and losses matters…. a lot. In 2006 few imagined what would unfold in 2008. Many retirees or near retirees saw their retirement plans vanish in months. Some moved into rental properties and sold remaining assets at deep discounts just to cover expenses. Some say 2008 won't happen again. Ask them to sign a contract guaranteeing no future financial crimes or market collapses, they won't. As you approach retirement, especially within 10 years, your portfolio should shift towards safer investments. A 20% loss just before retirement can be devastating. Unfortunately, many take bigger risks late in the game to make up for lost time.
Market Volatility Risk
Markets are unpredictable. The S&P 500 has lost half its value twice in the last 20 years, yet has still grown by over 120% during that time. If you're retired or close to retirement, your risk tolerance declines. Large drops become more damaging. It's harder to recover if you're withdrawing during downturns. We'll dive into real recovery timelines, 2000 to 2022 in a future post.
Are there solutions? Yes! And while no strategy is perfect, the goal is mitigation. Volatile markets, low interest rates, and longer life expectancies are pushing people to re-evaluate how they save for retirement. Consider financial products that offered market-linked growth potential, protection from losses and downturns, principal guarantees, optional income riders for inflation protection, downside protection, or guaranteed lifetime income, so your paychecks never run out.
A stressful retirement is often an unhealthy one. Protecting yourself doesn't have to cost much, but ignoring the risks could cost everything. It's important to reassess regularly. In future posts, we'll explore each risk in more detail and discuss products and strategies that may help you live the retirement you've always imagined.
Schedule a call today and we can talk about your particular needs and concerns, and make sure you are on the right track for protecting your retirement assets.
