5 Key Risks in Retirement

Subtopic: Châteauneuf-du-Pape Air Date: June 25th, 2020

Boomers are facing longer life expectancies than any generation.  Experts tell us this group will need to plan for retirement that could last more than 30 years. An entire generation is feeling the squeeze of retirement costs, increasing life expectancy and the balance of not outliving their retirement nest egg.  Fidelity completed a study that revealed, on average, investors are beginning to work with retirement advisors up to 20 years before their planned retirement.

You may be in retirement longer than you think

  • Will my retirement savings be enough?
  • Can I maintain my current level of spending?
  • How should my assets be allocated?
  • Can I retire now, or should I wait?

Retirement income is basically two parts

  1. Personal savings
    • Earned income
    • Investments
    • Rental income
  2. Outside sources
    • Pension
    • Social Security

So, what are the 5 Key Risks?

  1. Longevity – people are living longer in retirement. In fact, sources say that a couple, age 65, have a 50% chance of one spouse living to age 94 and a 25% chance that one will live to 98. Yet, many people are underestimating their life span, effectively increasing the risk of outliving their assets.
  2. Health Care Expenses – Rising health care costs coupled with inadequate health care coverage can have a devastating effect on retirement income plans. Fidelity Investments estimates that a 65-year-old couple will need approximately $285,000 to cover medical costs in retirement.
    • 19% on prescription drug out of pocket costs
    • 39% expenses associated with Medicare Part B and D premiums
    • 42% on Medicare cost-sharing provisions; copayments, coinsurance, deductibles, and excluded benefits
    • The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.
  3. Inflation – even low levels of inflation can damage purchasing power. Let’s assume $50,000 of lifestyle expense today. If you plan to retire in 5 years, your buying power:
    • At 2% inflation is down to $30,477
    • At 3% inflation is down to $23,880
    • At 4% inflation is down to $18,756
  4. Asset Allocation – An overly conservative portfolio can expose retirees to the risk of outliving their assets, while being too aggressive may increase the potential for portfolio losses. The fact is, unless your nest egg is larger than normal, retirees need some exposure to stocks for the long haul. Compared to rising costs, average annual investment returns can help you investors meet various goals. Consider this:
    • Inflation of 3% and health care costs of 5.5%
    • Balanced portfolio averages 7.96%
    • Conservative portfolio averages 5.96%
    • Growth oriented portfolios average nearly 9%
  5. Excess Withdrawal – Sustainable withdrawal rates can extend the life of a portfolio. The question is, will your spending habits, needs, or inflation force you to take withdrawals which exceed recommended rates. Let’s look at an example of a couple, both age 65, with $500,000 of investable assets and inflation adjusted withdrawals. For this example, we used a 50% Stock, 40% bonds, and 10% short-term investments – a 50%/50% allocation. We used 1972 as our start year and tested withdrawal rates of 4%, 5%, 6%, 7%, 8%, 9% and 10%.
    • The 4%, inflation adjusted, withdrawal rate provided the best outcome – the portfolio had a value, 40 years later, of approximately $1.3 million.
    • The 5%, inflation adjusted, withdrawal rate drained the portfolio by the couple’s age 88.
    • The 6%, inflation adjusted, withdrawal rate lasted just over 20 years.
    • The 7%, inflation adjusted, withdrawal rate ran out of money 4 years sooner than the 6%.
    • The 8%, inflation adjusted, withdrawal rate was exhausted in just 13 years.
    • The 9%, inflation adjusted, withdrawal rate was exhausted in just under 12 years,
    • And, the 10% withdrawal rate lasted only 11 years.