Understanding The Common Risks Around Retirement Planning

Understanding The Common Risks Around Retirement Planning

Anyone in their pre-retiree years should consider planning for retirement. While the global recognition of professional planners within the financial planning field continues to grow, the general principal is perhaps more important than ever.

Today’s retirees face vastly different circumstances than people in the past. People who are considering retiring are getting into a new way of living, and they might face more risks and different risks than pre-retirees of years ago.

Issues with Spending and Earning Money

People who are retiring no longer have as much flexibility when it comes to generating income. That means it might be harder to maintain their current standard of living, especially since interest rates are so low, making it harder to generate income from bonds.

In the past, investments were a great way to accumulate wealth, but people who have retired need to create a stream of income from assets they already have, which can constrain their ability to invest.

Greater Risks to Investments                                      

People who are retiring are now more vulnerable to risks on their investment returns than in the past. If the returns early on are not great, they might not be able to withdraw as much as before and keep it sustainable. The long-term market rates and sustainable rate of withdrawal might be two different things.

The market returns near the start of retirement are more important than you might think as well. For instance, it is often a poor decision to retire at the beginning of a poor market. Over the next several decades, the average return might be great. Still, if you experience early negative returns, it can be disastrous. That is because you have already started living off your portfolio, which can quickly deplete your funds.

You will then have a smaller amount of money to live off of. Even if the market recovers later, there will not be nearly as much for you to invest. Because of sequence risk, a longer recession early on could increase your risk of not having enough money. Some types of retirees might have worse outcomes than others, depending on when they want to retire.

Lifespan Uncertainties

One of the main retirement risks is that you do not know how long you will have to live. The retirement length could be longer or shorter than you are expected to live. Having a long life is a great thing, but it can cost more and drain your finances faster, and you might need to cover the cost of an assisted living home at some point. You will need to think about how long your plan can realistically keep generating income.

Many people believe that it’s rare to live beyond age 85. But this is simply not true. It is a little known fact that if you make it to age 65, as a male you will have a 20% chance of making it to age 90. If you are female, the odds are even higher at 33%. So when putting in an assumption for life expectancy in a retirement plan, it is wise for most people to be conservative and assume they will live until at least age 90.

Spending Shock

There are always unexpected expenses in life, and retirement is no exception. There are many reasons you could find yourself face an unexpected cost, from healthcare costs to theft to fraud. You will need to have some of your assets liquidated so you can cover these things. When you are planning a long-term budget, you will need to ensure you have a sufficient emergency fund set aside.

Inflation

You might have planned to have a certain amount to live off of each year, but inflation might cause you to need more than originally planned. Your savings’ purchasing power might be much lower than when you originally placed it in the account. And if you plan to have a longer retirement, even a bit of inflation can have a long-term impact on you. It is always best to have more set aside than you thought you needed.

Declining Mental Abilities

You will also need to plan for cognitive issues before you retire, as they could reduce your decision-making and portfolio management skills since it will be harder to make better decisions. Plus, a lot of households do not manage their finances evenly. If the person who manages them dies first, the other will be more likely to make financial mistakes. This can be mitigated by ensuring each person would be able to take over if necessary.

Closing Thoughts

The good news is that not everything is bad since you can create a retirement plan to manage the risks well. That is why having great retirement planning is important, even if it is a long way off. The more you plan now, the better off you will be once you no longer need to work.

Cristina Macias
Cristina Macias is a 25-year-old writer who enjoys reading, writing, Rubix cube, and listening to the radio. She is inspiring and smart, but can also be a bit lazy.