4 Risks in Retirement
By Steve Gaito
There are 4 risks that every retirement plan needs to address.
- Longevity – How long you will live
- Market – The ups and downs of the investments you have
- Health – The impact of aging on our health
- Taxes – How much the government taxes
With the change in the way that companies provide retirement plans, the “Market” seems to get all the attention when it comes to retirement. The reality is if you do not address the other risks they may have a significant impact on your retirement. Let us take a look at each of these risks and how I create a complete retirement plan.
Longevity is one of the biggest challenges that you face. In fact, there is a joke in the financial planning world that if you could tell me exactly when you will die, I can tell you exactly how much you can spend each day. The reality is no one knows exactly how long they will live. Most planning is based on a life expectancy of 85 years for men and 90 for women. But there is a 25% chance that a healthy 65-year-old will live past 90. Given this information how do you manage Longevity risk? The answer is Social Security, Pensions, and Annuities. All of these provide income for life. In my practice, I provide an analysis of Social Security for every retirement plan I create. The reason is Social Security provides one of the best resources to deal with Longevity risk because it provides income for life, you have already paid for it and it usually provides some cost-of-living adjustment.
The second risk is the market. When I started in the retirement planning business 28 years ago there were usually 4 asset categories in most retirement plans. Large Cap funds, International funds, Bond funds, and fixed interest. Depending on your tolerance you would divide your account between these choices. This has changed with modern portfolio theory and Monte Carlo simulations that help address the risk you are taking. Between the years 2000 to 2003, we learned that this does not always work and that some of the market risks must be taken out of the market in retirement. Recently fixed investment returns have been so close to zero that creating income portfolios very difficult. Fixed annuities can help with some of this risk, and other insurance products have been created to help as well.
The third area is health. As you are probably aware health costs continue to rise and for those on a fixed income, this becomes a big risk. You can help your cause by staying active and seeking preventative healthcare to stay healthy. This is just part of the risk. Long-Term-Care has become a big risk to the point that I tell people that you do not have a retirement plan unless you have a plan to deal with Long-Term-Care. Fortunately, there have been great plans developed to help almost anyone address this issue. There are traditional plans that are using it or lose it like homeowners insurance. There are Life Insurance policies that have long-term care riders on them and there are asset-based policies that are either an annuity or life insurance based that basically just allocate some money to be leveraged for care.
The fourth area is taxes. Taxes are the most overlooked risk in retirement. Considering that the majority of people have money saved in qualified plans like a 401(k) plan this risk is real. Knowing when and how to pay these taxes can make a significant difference in the net income you receive in retirement. It is critical to compare the cost of paying taxes now vs paying them later when they are likely higher. One area that is not usually considered is the change when a spouse passes away and they change from a married filing status to a single filing status. When this happens taxes likely increase and net income decreases.
I work with clients to help address each of these areas and provide a free initial consultation. To learn more or schedule a meeting go to my website www.retirerm.com for details.
Steve is the owner of Faith-Based Health Care and Retirement Resource Management. He is a National Speaker on the topic of Social Security optimization, quoted in national publications like Money Magazine, US News and World Reports, and Fox Business. Steve loves to educate and teach on financial topics like taxation of retirement accounts, long term care, healthcare, and efficient savings plans for small businesses. He has provided financial planning for missionaries through the International Mission Board. You can find Steve at 68 South Main St. in Marion, NC by calling 828-559-0299, email firstname.lastname@example.org or visit his website at www.faithbasedhc.com.
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