Few things feel better than to – finally – arrive at retirement confident about all the planning and saving you did to cause it to happen. It was decades in the making, but now it’s here.
Unfortunately, you may not be out of the financial woods yet.
A number of risks to your retirement strategy can still lurk even as you appear to have safely arrived at your post-work destination. Some of the most common ones include:
- A significant market drop shortly before or early in your retirement. We all know that what the market gives, the market can take away. But a sudden market drop right when you are reaching retirement can be especially devastating. You have less time to make a comeback, especially when you are starting to withdraw from those accounts at the same time the market is giving you fits. Think of it this way. If you have $1 million, and take a 10 percent loss, that’s a $100,000 drop, taking you to $900,000. Now let’s say the market rebounds 10 percent. That means you recover only $90,000 of the $100,000. And if you had withdrawn some of the money to live on, you will recover even less. One way to at least partially avert this risk is to begin moving some of your portfolio into more conservative investments as you near retirement age. When you were relatively young and in the accumulation phase of investing, you could afford to take some risks. But now your investment strategy needs to focus more on keeping what you have. This means focusing on preserving capital instead of making market returns or growth. It aims to safeguard your portfolio by investing in low-risk investments. These include certificates of deposits (CDs), Treasury bills (T-bills), and fixed-income securities.
- Unexpected home repairs. While everyone knows a home needs a little TLC, sometimes a few unexpected repairs need to be done. These could end up costing quite a bit of money, especially when you’re on a retirement budget. Even the small ones could add up more than you’d think. It’s worth having a plan in place to minimize these as much as you can. When you notice small issues with your roof, for example, get a roofer in early. It’ll avoid the need for larger, and more expensive, repairs in the future. The same can be said for any other kind of repairs.
- Inflation that reduces your spending power over time. Even when it seems like you have enough money in retirement, it’s possible you don’t if you failed to factor in for inflation. Let’s take a look at that $1 million again and say that each year you plan to withdraw 4 percent, or $40,000, for living expenses. That $40,000 won’t have the same spending power in year 10 of retirement as it did in year one. That’s why it’s important to account for inflation as you are creating your financial plan and trying to determine how much money you need for retirement. Aside from your savings, having an emergency fund is essential to cover unforeseen expenses without selling off assets. Financial experts recommend setting aside an amount equivalent to your living expenses for three to six months. When you have an emergency fund, you can safeguard your long-term investments by avoiding withdrawing money from these accounts.
- Unexpected medical and/or long-term care expenses. As you age, health problems can emerge that could quickly drain your money as you pay for hospitalizations, expensive prescriptions, and numerous visits to specialists. At some point, you could require long-term care, which comes with a staggering price tag. The average cost of a semi-private room in a nursing home is $7,756 a month, according to the Genworth annual cost of care survey. Genworth also reports that seven out of 10 people will require long-term care in their lifetimes. One option for planning for this is to purchase long-term care insurance, but there are other routes to explore as well. You can try other financial products, such as a health savings account, to fund your long-term care expenses. It’s also prudent to periodically review your retirement plan and assess your capacity to finance medical costs.
- Outliving your assets. People are living longer than ever, which is great, but longevity increases the odds that you could outlive your money. If you are calculating that you just need enough money for a 10 or 20-year retirement, you could be in for a surprise. For example, more than one in three 65-year-old women will live to be 90. For 65-year-old men, it’s more than one in five. Of course, many will live beyond 90. It’s best to expect a long life and plan your finances accordingly. Ensure you have sufficient savings and emergency funds to cover your needs in the long term. To make the most of retirement, consider downsizing and moving into a retirement village where you can live as independently as possible with the added benefits of security, quality healthcare services, and maintenance. Aged care centers are usually located in the area for when you get older and require a higher level of care. To learn more about retirement villages, you can check reputable websites for information or find more here.
While all of these factors pose a significant risk to your retirement, a financial professional should be able to help you create a plan that will reduce some of your exposure.
Retirement should be a time of enjoyment, not a time to fret over every dollar and how tomorrow could bring unpleasant surprises.
