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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
-
Trade Uncertainty Sparks Whipsaw Session: Stock Market TodayVolatility is making a cameo here in mid-October, a generally positive month marked by its historic stock market events.
-
How to Add Your Passport to Google WalletTravelers can now store and use their digital passport on Android for faster, more secure airport experiences.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial AdviserThe lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
Five Retirement Planning Traps You Can't Afford to Fall Into, From a Wealth AdviserTo help ensure you reach your savings goals and enjoy financial security in your golden years, be aware of these common pitfalls. The key is to be proactive, informed and flexible.
-
Your 401(k) Can Now Include Alternative Assets, But Should It? A Financial Adviser Weighs InMany employer-sponsored plans offer limited investment options, which can stunt growth. But participants considering alternatives might need some sound advice to get the most from their accounts.
-
Will Taxes Shred Your 401(k) or IRA During Your Retirement? It's Very LikelyConventional wisdom dictates that you save in a 401(k) now and pay taxes later, but turning that rule on its head could leave you far better off. A financial planner explains why.
-
More Retirees Are Renting: Should You? A Financial Adviser Weighs InIn some ways, renting is cheaper, more flexible and easier, but unless you understand the implications for your taxes and health costs, it might not be for you.
-
Where There's a Will, There's a Way Your Assets Will Be Distributed as You WishYour will is the backbone of a strong, adaptable estate plan that ensures what you leave behind goes to your selected beneficiaries. Without a will, state laws determine who gets your assets.
-
I'm a Financial Adviser: This Is What You're Really Losing if You Cut Back on Your 401(k) ContributionsMissing out on the benefits of the employer match and compounding growth could force you to work longer and lower your standard of living in retirement. Here are some alternative options.
-
Preferred Bank Stocks: The Investment Retirees (and Others) May Be Missing Out OnMost large banks issue preferred stocks that pay out fixed dividends, often with higher yields than bonds. Should you make room for them in your portfolio?
