Written by:Soren T. Christensen, CFP®, CIMA®, ChFC®, MBA, Founder & Chief Planning Officer, Advanced Wealth Advisors
Are you dreaming about or are you already in retirement? Before you settle too far into your days on a boat with a drink in your hand, you need to be aware of five risks that could jeopardize your retirement success.
A successful retirement requires considering the inevitable rise in the cost of living. You know that it will cost more to maintain your current standard of living in five, ten, and twenty years. But do you know just how different it will be? If we assume a 3 percent inflation rate, you will need approximately 16 percent more funds in five years, 34 percent more funds in 10 years, and 80 percent more funds in 20 years to live the same as you do today. Although inflation has averaged between 2-3 percent per year since the 1990s, inflation topped 10 percent some years in the 1970s and 80s. What happens if this recurs in your golden years?
Living too long is another risk to a comfortable retirement. The concept is a bit counterintuitive: How could living longer be bad? We all wish for immortality. The problem is, many people underestimate their life expectancy based on the experience of previous generations. People are living much longer these days due to improvements in public health, nutrition, and medicine. According to the National Institute on Aging, life expectancies doubled in the 20th century and continue to improve. Will living too long mean you run out of money?
We all know there’s risk in the stock market. How it performs in the years before you retire strongly affects your retirement success. People who retired in 2003 and 2009 did so after substantial stock market selloffs. For some, this resulted in a 50 percent loss in the value of their retirement assets. Consider what this risk means to the longevity of your portfolio—especially when you start taking income. Will you have to substantially alter your standard of living?
Income sources you may view as “guaranteed,” such as a pension or social security, also may be at risk. Would the loss of one or both of these cripple your retirement plan? And how guaranteed should you assume they are? More and more employers are shifting responsibility to employees to save for and manage their retirement funds. Are you sure your funds are allocated the way they should be? We hear constantly about the ills that threaten the future of the social security system. Are you planning a contingency that does not rely on these funds, or that accounts for a reduction in your social security or pension income?
The rising cost of healthcare is a harsh reality that can hit retirement funds hard. Healthcare costs have far outpaced the rise of general inflation and workers’ earnings over the last few decades. Fidelity studies show that a couple can expect to spend, on average, $285,000 on healthcare over their joint retirement. Are you planning on these costs eating into your retirement nest egg?
In Conclusion
These are just some of the risks to your successful, comfortable retirement. You should meet with a qualified financial advisor to discuss all the risks to your retirement and design a comprehensive financial plan to address them. If you would like to speak with us about your retirement, please contact us today.