Risk: Life is full of it, and that doesn’t stop when you hit your retirement years. Even if you spend decades planning and judiciously saving for retirement, you still face the unexpected hiccups that could disrupt all you’ve planned.
Part of careful financial planning includes accounting for risks. How will your plan bear the brunt of both unanticipated and known risks? It’s never something that can be foreseen with complete certainty, but understanding that there are potential risks and what those are can help you better plan and prepare.
Here are three categories of risks that every retiree (or future retiree) should be aware of.
Longevity Risk
This is the risk that you’ll live longer than your retirement savings will last, and this risk in particular has become more acute in recent years as life expectancies in the United States have increased. Of course, it is impossible to predict how long you will live, but underestimating your own life span can bring great financial stress in retirement.
There are a number of actions you can take with the aim of ensuring your retirement savings last as long as (or longer than) you do. For example, there are some investment vehicles that provide a steady stream of income during retirement that you may want to consider, including annuities, risk sharing (or risk pooling) in annuities, and laddered bonds.
Another important action (in our opinion)? Discuss longevity risk with your wealth advisor. It’s part of his or her job to manage your retirement plans and investment strategy with all sorts of risk in mind, and that includes longevity risk.
Financial Risks
This is a broad category of risks that encompass all sorts of “it could happen” or “it will happen” events and economic circumstances that may impact everything from your retirement age to how well your money stretches in retirement.
A big one? Inflation. According to history and just basic economics, inflation isn’t an “if” but “when” scenario that erodes the purchasing power of retirees, particularly those on a fixed income.
Another financial risk? Stock market volatility that results in big losses to retirement savings. Historically speaking, stocks outperform other investments over a long period of time, but if you’re near or in retirement and suffer a major loss, you may not have the time to recoup those losses.
Interest-rate risks can also minimize your retirement income, because lower interest rates lower your growth potential. Rising interest rates, on the other hand, can have a negative impact on retirement income if it means a drop in the market value of bonds, and because rising interest rates tend to negatively affect the stock market.
Health and Personal Risks
Healthcare costs in retirement account for a huge chunk of retirement expenses. From unexpected illnesses to the escalating costs of both private health insurance and prescription medications, medical bills can really deplete a retiree’s savings account.
Even if you use Medicare and have private health insurance, long-term care is not covered by either (a fact that is surprising to many retirees). Long-term care insurance is often recommended to help mitigate the risk that these costs will eat up your savings. Talk to your wealth advisor to find out what they suggest based on your financial plan.
Just as you likely can’t predict every health problem and expense, there are personal and family matters that may arise and have an impact on your finances in retirement. These include the death of a spouse, divorce, or family members who may need financial support from you for whatever reason.
The most important thing you can do is create a financial plan, and it can help to work with a trusted financial professional who has the benefit of tools and expertise to develop a plan that’s as resilient as possible. Even though life is full of surprises, having a plan can provide peace of mind.
