Managing Risk in Your Golden Years.
Embarking on your golden years should be a time of relaxation and enjoyment but ensuring that your hard-earned savings will last may feel daunting. With so many unknowns and limited opportunities for new income, managing risk during your retirement years is essential.
From rising inflation, healthcare costs, and the uncertainty of outliving your savings, the challenges are real. Here, we dive into expert strategies that will not only help you weather these storms but will also help you maximize your money during retirement.
TOP FINANCIAL RISKS AFTER YOU RETIRE
Being on track with your retirement goals is a feat in and of itself, considering that about 28% of non-retired Americans have no retirement savings. However, various factors could put a portion of that savings at risk.
INFLATION
Inflation is unpredictable, but when it rears its head, it can wreak havoc for soon-to-be retirees or people who have already stopped working. For example, since inflation reached 9% in 2022, various studies report that 25% to 45% of households had to reduce their retirement savings, according to a report by the Center for Retirement Research at Boston College.
As such, many people in their older pre-retirement years are worried about their ability to retire when they reach the appropriate age.
For current retirees, inflation could directly impact their monthly budget as the prices of goods and services continue to climb while their income remains fixed.
What You Can Do
To protect against inflation, the first strategy to think about is having different "buckets" of retirement savings. "The first bucket of money is your retirement income to cover your fixed expenses, First-bucket income can come from various income streams, including company pensions, social security, annuity strategies, and rental income. The good news is that, as of 2022 (the most recent data available), most retired Americans (79%) do have multiple sources of private income, including 56% with a pension; 42% with interest, dividends, or rental income; and 32% with labor income.
In addition to those income streams, it's ideal to have another layer of longer-term investments set aside to keep growing aggressively as you age. "This second bucket of money is designed to keep pace or hopefully outpace inflation.
RUNNING OUT OF MONEY
(LONGEVITY RISK)
How Often Do Americans Run Out of Money in Retirement?
About 40 percent of all U.S. households where the head of the household is between 35 and 64 are expected to run short of money in retirement, according to a 2019 report by the Employee
It’s only a projection but studies on current retirees reveal similar results.
Half of Americans over age 65 who live alone lack the resources to maintain independence and meet their daily living costs, according to a 2019 report from researchers at the University of Massachusetts Boston.
The report draws data from The Elder Index, an ongoing research project that measures the income older adults require to cover their basic needs.
While some seniors may escape the traditional definition of poverty, the 2019 study illustrates how many still grapple to make ends meet.
In 1990, there were 2.9 centenarians for every 10,000 adults age 65 and older worldwide. That number is projected to rise to 23.6 by 2050. "We are living longer, so our money must last longer," If you retire at 65 and live to 100, your plan must give you income for 35 years." What You Can Do Though Social Security benefits are for life; it won't be enough to cover all of your expenses if you outlive your other assets. Financial planners typically recommend that you have 70% to 80% of pre-retirement earnings available to you each year in order to enjoy a comfortable retirement. Social Security only replaces about 40%.
To close that gap, one thing you can look into is annuities. An annuity is an insurance contract bought by individuals in which they get an income stream in return for a premium payment. There are different types and structures of annuities, but if longevity risk is your main concern, consider one that offers a lifetime of guaranteed income payments (called pensions).
RISING HEALTHCARE COSTS
One of the biggest risks to your retirement nest egg is health-related expenses. Even if you enter your retirement years in good health and have solid health insurance, older people are simply prone to higher out-of-pocket costs. One study projects that a healthy 65-year-old male retiring in 2024 should expect to spend about $281,000 on healthcare expenses during his retirement. In today's dollars, that's equivalent to $188,000 in savings. Another report, by KFF, found that more than 1 in 4 people age 65 and older have trouble affording prescription drugs. What You Can Do "The need and cost for long-term care can torpedo your retirement plan and assets,". And long-term care insurance policies, while better than in years past, aren't necessarily the answer because of their expense and complex fine print, he adds. One avenue to explore? Life insurance says Moore. "Life insurance is the single best wealth transfer tool in the world," even though it can be expensive. On the plus side, if you can afford a policy with living benefits, it can take on the role of long-term care insurance as needed
SEQUENCE OF RETURNS RISK
Another golden-years risk is if you're one of the unlucky retirees who stops working right as the markets go into a down period, known as sequence of return risk. "Simply, a retirement portfolio that happens to experience positive returns early in retirement will outlast an identical portfolio that must endure negative returns early in retirement," . This is true even if the long-term rate of return for both portfolios is identical, he adds. What You Can Do "When negative returns are experienced early in retirement, retirees need to be flexible with their spending," says Petersen. He adds that having emergency cash reserves, home equity, and alternative sources of income can help mitigate this risk.
Or, if possible, you could consider working just a bit longer, as nearly 1 in 5 retirement-aged folks are doing these days. Doing so may allow you to delay your Social Security so that your payments will be higher, or it could just mean not having to rely as heavily on your investment funds in the early years of your retirement.
MARKET VOLATILITY
Bear markets, which are prolonged periods of market decline, are bound to happen at some point during your retirement. In fact, there have been 15 of them since the 1940s, with the average one lasting 11.1 months. Overall, these periods have resulted in an average cumulative loss of -31.7%. Without question, that sizable of a loss in your retirement accounts could be devastating, so you have to protect yourself against that and avoid panic selling.
What You Can Do
If you've set yourself up with enough income to cover your bills, that gives you a bit of breathing room in your "second bucket" investments to ride out tough markets, says Mangold: "If your fixed expenses are covered by guaranteed income, you can worry less about day-to-day fluctuations in the market." In years when the market is on an upswing, you may have a bit more withdrawal wiggle room if you want to enjoy a special trip or make a home improvement. But in down market years, it would benefit you to scale back on extra spending. Considering the average bull market period lasts 4.2 years with an average cumulative total return of 148.9%, the ability to wait out downturns and reap THE REWARDS IS CRUCIAL!
THE BOTTOM LINE
OUR HOLISTIC APPROACH to navigate the complexities of retirement involves combining your Social Security Timing Strategy Report with a Four-Part Portfolio. This process enables us to craft a personalized retirement roadmap just for you.
