5 Risk Factors That Can Affect Your Retirement Income
By Joe Globensky, RFC®
You’ve saved your entire working life in an effort to afford the retirement you want. Whether you are on the cusp of retirement, or you have years to go, understanding five risk factors that can affect your retirement income is essential.
While you may not experience them all, even one can alter your retirement plan. So, let’s make sure you have accounted for these when planning your expected retirement date, your expected retirement income, and if you have enough set aside for your ideal picture of retirement.
Risk Factor #1: Longevity
In 1970, the U.S. average retirement age for men was 65, and age 56 for women.1 At the same time, the average life expectancy was 71 years2, so planning for longevity wasn’t much of a need back then.
Fast forward to 2020 where the average retirement age for men is still 65, while women’s has crept up to 63.1 And while the average life expectancy for an individual has increased to 79 years2, according to the Social Security Administration, a 65-year-old couple has a joint life expectancy of 89 years.
So now, instead of the average retirement lasting approximately 10 years, it is closer to 25 years, thereby increasing the risk of outliving your money. If you haven’t run your retirement projections recently, you should make sure you are conservative in your estimates for how long you and your spouse will be in retirement given these increases in longevity.
Risk Factor #2: Financial Markets
Ever hear of sequence-of-returns risk? When you retire, you are most likely no longer contributing new money to your retirement account(s). But you may be withdrawing funds to pay for your retirement lifestyle.
If you retire during a bull market for stocks, your retirement withdrawals may be offset, at least partially, by gains in your portfolio value. However, if a bear market occurs for months or years, each retirement withdrawal is taking a bite out of the account balance and is not being offset by new deposits. You’re taking the same amount of cash out of an account that is steadily shrinking in size.
While there are ways to limit your sequence-of-returns risk, proper planning should be done before, during, and after retirement to ensure the plan is geared for success for as long as you will need it.
Risk Factor #3: Inflation
When we think of inflation, we often think about how much something cost us last month, like a utility bill. Or maybe last year, like rent or property taxes. Now imagine what something might cost 20 or 30 years from now when you are ready to retire. Even at a historically low inflation rate of 2%, in 20 years your money will buy 1/3 less than what it can today.
What if we focus on things you’re more likely to spend money on in retirement? In the last 12 months, food prices have increased by 4.1% and medical care prices have increased by 4.5%. At a 4% inflation rate, today’s dollar only buys about $0.43 worth of goods in 20 years. Not planning for future inflation is setting yourself up for retirement failure, or at least one that is not as enjoyable as it could have been if you had planned properly.
Risk Factor #4: Tax Rate
Just because you’re retired doesn’t mean you will no longer have to pay taxes. But knowing what your future tax rate(s) might be can go a long way in structuring a healthy retirement plan.
Now, you may already be asking, “How am I supposed to know what tax rates are going to be in the future?” And you are correct, we don’t expect anyone to know this. But you can make some assumptions based on your current income and capital gains tax rates, your future income potential, and what our future tax code might look like. This helps you devise a strategy that can be modified, when necessary. That way you’re not caught off guard by tax bills that cause your retirement to fall short.
Risk Factor #5: Health and Long-Term Care
Want to know how much healthcare really costs? There’s plenty of research that shows these costs continue to rise. In fact, according to the Bureau of Labor Statistics, the long-term average inflation rate for health care costs is 5.3%. And, as we age, the portion of our budget dedicated to healthcare expenses grows as well.
And while no one ever wants to experience a long-term care event, excluding it from retirement planning can lead to disaster. We’ve even previously discussed three important reasons to plan for long-term care. Unfortunately, COVID-19 has made us acutely aware of how having choices in times like these can make a huge difference.
Do you need help clarifying your plan for retirement? Or do you just need another set of eyes to review your current plan? At Connections Financial Advisors, we want to take the guesswork out of your retirement planning. And do it in a friendly, educational manner. We welcome the opportunity to sit down with you and guide you toward the retirement you desire. And the first meeting is complimentary. Give us a call today at 217-605-8130.
1 Center for Retirement Research at Boston College
2 United Nations – World Population Prospects
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