Five Primary Risks of Retirement
We have identified Five Primary Risks of Retirement that people must address or solve in order to have a financially secure retirement. These risks are identified and defined as follows:
Longevity
This is the risk that you will outlive your money. People are living longer and this trend will continue. For a married 65 year old couple there is better than a 50%* chance that either the individual or spouse will live to age 90.
What is the impact of the death of either spouse to reductions in income (social security, pension)?
When should you start receiving your social security benefits?
*Social Security Administration Period Life Table 2014 (published in 2017)
Overspending/Under-spending
Overspending is having the belief that you will die early and/or you will earn a high rate of return on your investment portfolios. As such, you will withdraw too much from your portfolios on an annual basis.
Under-spending is defined as being overcome by the fear of running out of money, therefore not taking sufficient withdrawals to enjoy retirement.
All expenses are not the same. How much are your need expenses and want expenses?
Timing/Sequence of Returns
Timing risk is the crucial relationship between the retiree’s withdrawal rate and the sequence of portfolio returns which has a dramatic impact on retiree’s financial security in retirement. See the Sequence of Return table in the appendix.
What is the appropriate percentage of the investable assets that can be withdrawn annually and maintain your definition of financial independence?
What is an appropriate asset allocation during retirement to minimize timing risk?
Maintaining Purchasing Power
With today’s retirement projected to last 30 plus years, inflation risk is much more of a threat for today’s retirees than it was for their parents.
Inflation constantly erodes purchasing power through increased costs while income taxes reduce the potential of investable earnings.
What inflation rate should be used for the next 25 to 30 years?
Everyone has a desire to optimize tax consequences, in practice this is complicated by the uncertainty of plan assumptions:
- How do you decide what assets to use first, qualified
or non-qualified assets? - On a historical basis, ordinary income rates are
relatively low today. Where will they be in 10 years? - Social Security is subject to taxation.
Health Care Expenses/Risk
Health care expenses are increasing at higher rates than inflation.
It is estimated that one out of every three retirees will spend time in a assisted living facility or need in-home care. Should this risk be self-insured or transferred to an insurance company?
*Source: California Department of Aging 1991 Government Study – Statistics have not been updated since 1991