Successful Retirement – Dealing with Retirement Risks
By John Dombroski, Grand Canyon Planning Associates
Retirement has always been a tough undertaking. But in today’s tumultuous economy, it sometimes seems like an impossible task. There’s no question there are financial risks associated with retirement. However, you can manage these risks. Here are the top five most common retirement risks and the best ways to deal with them:
Risk #1: Outliving Your Money
Running out of money is not just a scary prospect, it’s also one of the biggest risks all retirees and soon-to-be retirees face. In the retirement planning world, this is known as “longevity risk.” According to the Society of Actuaries (SOA), Americans are living longer, which means the risk of outliving their money is higher. The SOA estimates the average life expectancy for 65-year-old Americans at 17 more years for men and 20 years for women. However, 30% of women and 20% of men aged 65 will live until they’re almost 90 years old. That means many people may live up to 25 years or longer after they retire.
How to deal with it: As long as you save enough money for retirement, avoid overspending, and invest wisely, the problem should avoided. You may consider taking a part-time job after retirement or even delaying retirement. Investing in payout annuities—managed payout plans (longevity insurance) an annuity that does not start paying benefits until an advanced age, such as 85—is another option Some retirees also apply for a reverse mortgage.
Risk #2: Skyrocketing Inflation
According to the SOA, annual inflation in the US was 3.5%.from 1980 to 2007. Based on that percentage, a product that cost $1 in 1980 cost $2.82 in 2007. Inflation in specific areas can have an even greater impact on seniors. Studies show that health care represents 5% of the average person’s budget before retirement, but grows to 10% for retirees ages 65 to 74 and increases to 15% for retirees 75 and older.
How to deal with it: To prepare for the effects of ever-growing inflation, SOA recommends retirees and soon-to-be retirees invest in assets that grow in times of inflation, such as common stocks, inflation-indexed Treasury bonds, inflation-indexed annuities, and commodities and natural resources. Semi-retirement for a couple of years before fully retiring also slows the drain of retirement assets.
Risk #3: Unpredictable Interest Rates
While many consumers are thrilled about today’s low interest rates, retirees and soon-to-be-retirees aren’t too happy about it because when interest rates are low on both short and long-term investments, retirees may be forced to re-invest their money at lower rates. Plus, many soon-to-be retirees who are investing in fixed income will have to save more to build up a sufficient retirement fund. While the SOA points out that government spending, inflation and business conditions all affect interest rates; it’s difficult to predict the future.
How to deal with it: To manage the risk of interest rates, the SOA says retirees and would-be retirees could invest in immediate annuities, long-term bonds, mortgages or dividend-paying stocks.
Risk #4: Stock Market Fluctuations
Because it’s practically impossible to forecast what will happen to stocks, many retirees fall prey to major stock market losses.
How to deal with it: First of all, the SOA says, retirees and older workers should limit stock market exposure. If you do invest in the stock market, be sure to diversify; spread your money among different investment classes and individual securities to decrease your risk. Also consider investing in financial products like mutual funds that invest in stocks, but guarantee against the loss of principal.
Risk #5: Disappearing Retirement Funds
If your employer declares bankruptcy, what happens to your pension? If your annuity insurer becomes insolvent, where does that leave you? Many terrible things can happen to your retirement funds but there are ways to manage these risks.
How to deal with it: Before investing, do your homework. Check credit ratings to determine if any may be at risk for bankruptcy. Look into an insurance company’s claims-paying ability rating. Of course, you are already protected from some risks such as if your employer does go out of business, the Pension Benefit Guaranty Corp insures your defined-benefit pension plan (up to certain limits.) Annuity companies are covered by state insurance guaranty funds up to specified limits so if the insurer becomes insolvent, claims will still be paid.
Author john Dombroski is with Grand Canyon Planning Associates, LLC and may be reached by calling 480-991-1055.