Retirement: Avoiding the Big Risks

A combination of science and art, retirement planning has always been complicated.  Today, more than ever, developing a successful retirement plan demands an unwavering focus on keeping what you already have and ensuring an income stream throughout your retirement years.  

How do we accomplish that?  It’s not easy, but one way is to address the biggest risks or threats that so many of us face.  Here are six worthy of careful attention.

Rising health care costs:  People are living longer than ever.  Combine that with rampant health care inflation, declining employer coverage for retirees, and certain government programs that may not remain viable, and you have a prescription for disaster.  An “average” 65-year-old couple could spend hundreds of thousands of dollars on out-of-pocket medical expenses.  This possibility needs to be a serious part of the planning process, particularly for younger and middle-aged individuals and couples.

Long-term disability:  According to U. S. government statistics, more than two-thirds of us will face a long-term disability requiring some form of long-term care whether at home, in assisted living, at adult daycare, or in a traditional nursing home.  Needless to say, it is very expensive with annual costs ranging from $30,000 to $100,000, depending on type and level of care.  Consider long term care insurance as a first line of defense.

Increasing life expectancy:  The good news is that we’re living longer – quite possibly into our late eighties and nineties.  The bad news is that we could outlive our assets.  Your plan should assume a much longer life expectancy, which may call for more aggressive funding by you as a result.  You may also wish to consider converting some portion of your retirement savings into a guaranteed income stream.

Inflation:  Although not a threat today, inflation will be back, once again eroding our ability to comfortably purchase goods and services in the future.  This suggests that certain types of investments should be considered as an inflation hedge.  They include growth-oriented stocks, Treasury Inflation-Protected Securities (TIPS), and others. 

Being too conservative:  Given the poor performance of stocks over the last decade and exceptionally high volatility of the last three years, it might be easy to dismiss this threat.  Yet being too conservative can be just as dangerous as being overly aggressive.  An overly conservative approach exposes us to the dangers of inflation and running out of money during our lifetimes.  Have a serious conversation with your advisor about risk, volatility, and the need for some growth.

Withdrawals from retirement savings:  In the hope that everything will “average out” over the longer-term, many people simply withdraw too much from their retirement savings.  This greatly increases the probability of running out of money before death.  Given the current state of the economy and markets, there’s never been a better time to review your budget and withdrawal patterns.  As a very general comment, if you’re withdrawing (or planning to withdraw) six percent or more of your retirement savings annually, you may be putting your future at risk.

Conclusion:
  The beauty of planning is that it provides an opportunity to exercise control over your future.  Whether you are still working or already retired, now is the perfect time to review your retirement plan in order to ensure that it still meets your needs and avoids the major risks outlined above.

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