Several risk forecasts can help determine whether a retirement plan is sound and will be successful. Each of these must carefully be analyzed and weighed as potential dangers to a secure retirement strategy. Whether you are retired, soon to be retired or still working full time and not planning to retire for many years, a retirement blueprint should be created to help ensure that the inevitable bumps in the road to retirement and thereafter do not derail your long term security.
Longevity risk refers to the possibility you could outlive your money…by many years. Remember that an average life expectancy is just that – an average. Many people in their 60’s or 70’s still have one or both parents living, which can be an indicator of their own longevity potential. Living past 90 or even 100 is more common than ever. What are you doing to help ensure you don’t outlive your income?
Market risk can also be called volatility risk. Few people look for investments opportunities that will lose most or all of its value. Instead, risk can arise from investing in something that is currently near peak value, only to drop substantially later on. The important issue here is that large market declines during the early years of your retirement can and will have a detrimental impact on your ability to withdraw income in later years. What are you doing to help mitigate or eliminate market risk to some of your retirement assets?
As people live longer, there is the likelihood of an increased need for medical care on a more frequent basis. Further, Medicare coverage limitations ensure that retirees will now shoulder more of these unknown expenses than ever. According to the Bureau of Labor Statistics medical costs have increased at double the rate than inflation. How have you planned for this eventuality?
T & I risk falls into the stealth risk category. We know it’s out there, but we may not be conscious of it on a daily basis. The combined impact can severely reduce purchasing powers and leave you with significantly less spend-able dollars. Many investors have not adequately considered whether taxes will be the same or higher during their long retirement. While some believe they will be in a lower tax bracket, that outcome may actually not be the least bit comforting. A 3% inflation rate causes prices to essentially double in twenty four years, and at 4%, it only takes eighteen years to double costs. What steps have you taken to reduce or eliminate taxes during retirement?
Long term care expenses, not covered by Medicare, can wreak havoc on a retirement plan. Though many people prefer to self-insure, the costs associated with LTC, not covered by insurance, can decimate a sound and carefully planned retirement strategy. Have you analyzed what the cost of LTC coverage is against what it might cost to pay out of pocket?
There is much debate as to the wisdom of adhering to a fixed withdrawal rate from your pool of assets. Conventional thinking had pegged that figure at approximately 4%. However, recently, it has suggested this figure may be untenable if that asset pool suffers even modest valuation declines in the early years of retirement and/or suffers additional declines in later years. The resulting valuation may not support distribution levels once thought inviolable. Consequently, retirees may find themselves with not only a smaller principal balance, but an ever spiraling need to reach for higher yields, potentially putting some of their remaining assets at even greater risk. Reducing the distribution rate means retirees now have to manage to live on less income. When was the last time you stress-tested your retirement income plan?
There exists a real possibility that when your high interest bonds or other fixed income investments mature, options to secure the same or higher yield will not be available. Bonds may be called earlier than the stated maturity date and income oriented investments can and do mature with regularity. Replacement yields can often be much lower forcing investors to cope with reduced investment income or potentially accepting a lower quality rated vehicle, which is certainly not the favored approach in or near retirement. What’s your plan to maintain consistent retirement income?
It is quite possible that grown children may move back home when job or personal issues arise. Or, a family member may require substantial financial assistance to cover student loans or a down payment on a home. Have you had a candid discussion with your children regarding their finances as well as yours?
Remaining Thoughts: Have you left the planning and monitoring of your retirement strategy to a web site and pie chart? When was the last time you ran your plan through lifeboat drills?