Why Your Retirement Plan Will Fail: Part Five

Unfortunately, most articles out in the media today focus on a few financial topics; reducing spending/budgeting, paying down debt, buying a house and investing in low cost index funds. While all these topics are important there is one aspect of financial planning that is rarely discussed; describing what retirement is actually like.

Over the next month or so, we are going to take a deep dive into describing retirement from a financial perspective. We are going to look at what risks can derail a retirement and how to create a plan to mitigate those risks. Click the links for Parts One, Two, Three and Four. Let’s continue with the series and discuss longevity risk.

Who knew that living too long could be a problem. Without proper planning, it can be. Since Longevity risk multiplies all the other risks we discussed in parts one through four it may be one of the larger issues for retirees. As a retiree ages, expenses will change, they will experience more market corrections, inflation reduces spending power each year, their withdrawal rates will be stretched as medical expenses increase later in life.

Longevity risk means that a retiree will have to plan differently to combat retirement risks.

Market Corrections:

Stock market corrections occur frequently. Some are small one or two percent declines in value and some are more significant than that. On average, 10% corrections occur every 33 weeks and 20% market downturns occur on average every 127 weeks* (or 2.4 years). As you can see, the longer a person lives, the more market corrections they will have to endure.

Reducing the impact of market corrections could mean shifting stock-based assets to insurance-based assets like annuities or permanent life insurance. Insurance-based assets like an annuity will continue to give a retiree a payout based on the value of the annuity, not what happens in the market. 

Inflation:

Inflation erodes the spending power of a dollar over time. The longer the time horizon we look at the more inflation can wreak havoc. Remember when your grandfather told you stories about buying things for a nickel? That will happen to you.

A retiree must embrace a long retirement and line up their investments accordingly. A retiree needs to make sure that their investments are invested aggressively enough to combat the impacts of inflation.

Health Care Costs:

As a retiree ages, typically their health care costs will increase as in line with their aging. Most people know a loved one or know someone that has gone through a long-term care event. Even a healthy retired couple should expect to incur $280,000 in medical costs according to a Fidelity study**.

A long term care policy can be a great tool to help combat the high cost of medical care in retirement. Long term care policies can help those that don’t have the assets provide leverage against a health event and can help those with assets keep them or pass them on.

Overall, there are several challenges that can derail a retirement plan. Ignoring the potential problems and retirement risks will not make them any less impactful. It’s important to understand what they are, how they affect a retirement and what actions can be taken to mitigate those risks.

*Source: Alliance Berstein

**Source: https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs