Raleigh NC Financial Advisor: Retirement Risks
As financial advisors, we understand the financial risks and worries that come along with retirement.
Even with careful planning and diligent saving, some parts of retirement planning are out of your control. Factors like longevity, rising medical costs and the ups and downs of the market can have an impact on your savings. But while you can’t plan for the unexpected per se, there are ways you can manage these risks and protect your retirement income. Here’s a look at four common retirement risks and how to address them.
1. Longevity Risk
Americans are living longer now than ever before. Government figures put average life expectancy at about 79 years old, but you could live much longer than that, and financial experts suggest planning for retirement living costs well into your 90s.
There are many benefits to living longer, but it also means carefully considering strategies to avoid outliving your savings. One strategy to consider is to delay the age you start collecting Social Security benefits. You are eligible to start collecting Social Security at age 62, but the longer you wait, the larger your benefit will be. For example, if you turn 62 in 2021, and you can hold out claiming your benefit until age 70, you’ll increase your monthly payment by 77 percent.
You may also want to consider other sources of regular income, such as annuities to supplement Social Security benefits and withdrawals from retirement accounts. You typically purchase annuities with a lump sum, and the annuity then makes regular payments to you over a fixed period of time. That said, annuities come with unique trade-offs and risks.
For example, it’s possible inflation could rise higher than an annuity’s guaranteed rate. What’s more, annuities are generally illiquid investments, meaning your money will be tied up for a set period and you won’t be able to access it without facing stiff penalties. Discuss annuity options with a financial advisor before adding one to your portfolio.
2. Medical Costs and Long-Term Care
Another implication of living longer is increased health care costs. On average, a healthy 65-year-old couple can expect to spend more than $300,000 on health care alone in retirement. While Medicare covers many medical expenses you’re likely to face, it doesn’t cover everything, including the cost of long-term care.
Long-term care refers to assistance needed for daily activities, like eating, bathing or dressing. This type of care can be provided at home or at an assisted living facility like a nursing home. Those age 65 and older have a 70 percent chance of needing some form of long-term care as they age.
Even if you don’t anticipate needing long-term care anytime soon, it may be worth considering long-term care insurance now in case you need these services in the future. Consider purchasing coverage well before you retire as it typically becomes more expensive as you age.
Another option is a health savings account (HSA). This is a tax-favored means of paying for qualified medical costs available to people with a high-deductible health-care plan. Contributions are generally tax deductible, earnings are tax-deferred and distributions for qualified medical expenses are free from federal taxes.
Your HSA balance also can be invested, giving it the potential to grow over time. And the money in your account can be used to help with qualified costs that Medicare doesn't cover.
3. Market Risk
Market fluctuations are a natural part of the market cycle, yet a downward turn right before retirement can lower the value of your investments just when you need them most. As you near retirement, consider rebalancing your portfolio to include more lower-risk investments that are less likely to be affected when stock markets head south.
Speak with your financial advisor or financial planner about developing a withdrawal program that takes into account personal factors such as your age, risk tolerance and liquidity needs. The percentage of assets you can safely draw down each year — the way you build your retirement paycheck — might change as you age.
4. Rising Inflation
Inflation reduces your spending power and can have a big effect over a 30-year (or longer) retirement. There isn’t much you can do to stop inflation, however there are some strategies to think about as you face the future in a price changing environment.
Look for Spending Patterns
Rather than looking at what you’ve spent in the last two weeks, go through your bank and credit card statements from the last three to six months and make a list of all the money you have spent. You'll see if your expenses have trended upward during the last months, and you can evaluate the increase over time. This will give you an idea of how inflation has been impacting your total payments.
Do an In-Depth Budget Analysis
Take some time to think about fixed and variable expenses. Fixed costs tend to be relatively consistent from month to month. They could include your rent or mortgage, utilities, phone bill, cable payment and insurance expense.
Your variable costs are those that change, such as your spending on groceries and eating out, entertainment, hobbies and clothing. Add up your fixed and variable expenses from the last month and subtract them from your monthly income.
For budgets that are in the red, look at your variable expenses and see if anything can be cut or reduced. If you have extra, you might use it to pay off debt or put in an emergency fund.
Push Back Major Expenses
If you were planning to take an extended vacation but haven’t paid for it yet, you could postpone the trip. The same is true for luxury purchases like a new boat or a house remodeling project. If it’s hard to make it from month to month, you might put these funds toward day-to-day living.
Draw on Cash
For those with access to cash, it may be time to spend those funds rather than selling off stocks or making extra withdrawals from retirement accounts. When using cash to cover expenses, pay attention to every expense. Stretching dollars during an inflationary period could help you get through this uncertain time.
Check on Your Portfolio
You may have invested funds in different accounts and products during your working years. Now that you’re living off your nest egg, it can be helpful to see how your funds are diversified. Your financial advisor or financial planner can help to make sure your portfolio is properly allocated to manage risk due to changing market conditions.
It can be hard to know how long inflationary periods last. While some experts have made estimates, history tells us that inflation ebbs and flows over time.
Bottom Line
A sound retirement income plan may not have solutions for all of these potential issues and risks but understanding what might stand in your way and taking action to mitigate their effects will be critical to the long-term sustainability of your plan. Your financial advisor or financial planner can help you identify what risk factors might play a more important role in your retirement and can build a plan with you and your family’s long-term success top of mind.
Sources:
https://www.ssa.gov/pubs/EN-05-10147.pdf
https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
https://www.ml.com/articles/big-retirement-risks-and-how-to-prepare-for-them.html
https://money.usnews.com/money/retirement/aging/articles/how-retirees-can-cope-with-inflation
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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
