Retirement planning is one of the most important endeavors we will ever undertake. The current volatility in the stock and bond markets, along with the low interest rates being paid on safer investments, have combined to make this one of the most difficult times for retirees. Let’s look at nine top risks we all must face in our retirement.
1. Longevity Risk. The good news is that life expectancy has gone up. Today’s 65 year old life expectancy is 17 years for men and 20 years for women. 30% of all women and 20%, of all men will make it to age 90. The bad news is there is a very real risk that we will outlive our income. Social Security benefits and some annuity contracts provide for income benefits to the recipient for life.
2. Inflation Risk. The cost of goods and services keeps going up. A retiree’s money will buy less and less over time due to inflation. While Social Security benefits are indexed for inflation, other assets must be invested to provide for growth of income to offset the growing costs of those things retirees want and need.
3. Loss of a Spouse. The death of a spouse is a traumatic event. Adding to this sorrowful time is the very real possibility that the surviving spouse may be left with financial difficulties. Studies show that a single person needs income equivalent to 80% of the couples’ prior income. Social Security survivor benefits, wills, trusts, life insurance and estate plans are all essential tools to help the surviving spouse.
4. Interest Rate Risk. In a low interest rate environment like today, it is difficult to receive sufficient income from CDs or short-term government securities. Alternative investments should be considered when planning for your retirement income. It is critical to have a portion of your portfolio invested for growth.
5. Stock Market Risk. The stock market is one of the best places to invest if you wish to beat inflation. However, as we have seen, the market is risky. Having a portion of your assets in the market makes sense as long as the stocks are widely diversified and allocated among different asset classes.
6. Business Risk. Traditional pension plans and annuities are common sources of income for retirees. There is always a risk that the pension plan sponsor or an issuing insurance company could go out of business. Some protection against this risk does exit through the Pension Benefit Guaranty Corporation (PBGC) for pension plans and the state insurance guaranty funds for insurance company products. Corporate bonds do not have such guarantees. As always, it makes sense to review your pension fund sponsor,
and your insurance companies’ financial records for solvency.
7. Unexpected Health Care Costs. Health care expenses, especially prescription drug expenses, can put a real strain on retirees’ income. Medigap policies can supplement Medicare benefits to some degree. All retirees need an emergency fund equal to six to nine months of their income.
8. The Need for Care. According to a recent Genworth Financial report, the cost for non-Medicare licensed home-health aid service is $18 per hour, $38 per hour for a Medicare-certified nurse, and $59 per day for adult day care. The cost of an assisted living center is $36,096 per year, and $72,800 per year for a nursing home. Long-term care insurance can mitigate these expenses. The key is to buy it before you retire or soon thereafter. The cost goes up by age and current health conditions.
9. Unforeseen Needs of Family Members. Unemployment, guardianship issues, illness, or a divorce are all possible events that could call on a retiree to help a family member. An emergency fund can help. Emergency funds should be invested in liquid assets such as CDs, savings accounts, or money-market funds.
Careful retirement planning is now more important than ever. A solid understanding of the risks involved is a good starting point. Developing plans to overcome these risks is not a one-time thing. Plans must be made, implemented, reviewed and adjusted as needed. Your Money Concepts’ financial advisor is here to help. He or she will provide guidance and coaching, both now and into the future.
P.S. Please feel free to forward this to anyone you know that is contemplating retirement, or is retired. Your financial advisor will be happy to talk to anyone you recommend to them.