When you think of risk in retirement, what comes to mind? For many, the various risks associated with the stock market may be the first. From asset allocation risk (avoiding keeping all of your eggs in one basket) to sequence-of-return risk (the risk of taking out income when the market is down), these factors become increasingly important once your paychecks stop and you begin drawing from your investments for retirement income.
However, these are only the tip of the iceberg when it comes to key risks that should be considered for retirement planning in today's economy. Here are three areas I commonly see retirees and pre-retirees forgetting to consider:
1. Portfolio Failure Risk
How long can you live off of income from your investments? Is it likely that your investments can provide an income stream you won't outlive? There are many theories, such as the ever-popular 4% rule, which suggests that, if you maintain a portfolio consisting of 60% bonds and 40% equities, you can take 4% of your total portfolio each year. However, studies in recent years have shown this method to have about a 50% failure rate based on today's low-interest rates and market volatility.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Another withdrawal method is guessing how long you'll live and dividing your savings by 20 to 30 years—but what happens if you live 31 years?
If you do not have a written income plan for how to strategically withdraw from your accounts over the duration of your retirement, this may be a significant risk to consider.
2. Unexpected Financial Responsibility Risk
Life is full of surprises, and retirement is no different. Today's retirees are known as the "sandwich generation" with financial pressures coming from all sides—often having to provide for grown children and aging parents at the same time.
Additionally, there are difficult but significant financial planning considerations for the future loss of a spouse. You can expect to lose a Social Security payment and potentially see changes to a pension. Simultaneously, tax brackets will shrink when going from married to single, taking a larger piece of your already-reduced income.
Having a proactive, flexible financial strategy can be essential in helping you adapt to your many changing needs throughout the course of your retirement.
3. Health Care Risk
Beyond the considerations for inflation on daily purchasing power in retirement, rising costs of health care, particularly as Americans continue living longer, require explicit planning to avoid a physically disabling event from becoming a financial concern. From Medigap options to long-term care and hybrid insurance policies, considering insurance coverage for perhaps one of the most significant expenses in retirement may be a pivotal point in your retirement planning.
While these obstacles may seem daunting, identifying and understanding the concerns unique to your retirement goals should be the first step to help overcome them.
Christopher Scalese, Investment Adviser Representative, insurance professional and the president of Fortune Financial Group, focuses on assisting in the financial transition from working to retirement years.
Steve Post contributed to this article.
-
Stock Market Today: Stocks Pause as Investors Assess Fed PolicyThe Federal Reserve met expectations with a quarter-point rate cut.
-
Fed Cuts Rates Again: What the Experts Are SayingFederal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
Are You an Estate Planning Procrastinator? Where to StartQuit putting it off, because it's vital for you and your heirs. From wills and trusts to executors and taxes, here are some essential points to keep in mind.
-
Is It Too Late to Do a Roth Conversion if You're Retired?The short answer is: Not at all. Roth conversions can be great tax-saving strategies … for the right people. Are you a good candidate?
-
Five Options for Retirees Who No Longer Need Life InsuranceIf you're retired and you've checked with your financial planner that life insurance is no longer vital, here are five ways you can turn it to your advantage.
-
Five Financial Planning Secrets of MillionairesYou might be surprised: Most millionaires don't feel rich. Instead, they have smart goals, discipline and a little help along the way.
-
Here's Why You Shouldn't Put All Your Money Into Roth IRAsConverting a tax-deferred account to a Roth can be a good strategy for lowering future taxes, but moving all of your money at once is typically not recommended.
-
Three Advantages of These Underrated Accounts for RetireesUsing taxable accounts for some retirement savings in the 10 years before and after retirement can give you greater flexibility and benefit your heirs.
-
Are Election Jitters Shaking Up Your Investing Strategy?Many investors are retreating to safer investments until after the election, but doing so could result in missed opportunities. Here's what to do instead.
-
Don't Wait to Lock In High Estate and Gift Tax ExemptionsOne of the most sweeping changes to U.S. tax code in modern history could be on the horizon. Now is the time to maximize the legacy you leave your loved ones.
