Retirement Risks
Five major risks to retirement, according to Fidelity Investments, include:
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Overspending
Not planning for a long retirement
Market risk
Inflation
Health care expenses
What can you do to avoid the pitfalls of these traps? Start by being conservative with the amount of withdrawls you make from your retirement savings. Fidelity explains that, “A slightly higher rate of withdrawal can significantly decrease your years of retirement income. As a hypothetical example, a portfolio of $1 million with a 4% annual withdrawal rate could provide 6 years more retirement income than a 5% annual withdrawal rate.”
A realistic view of your lifespan will help with planning, too. Resources are available to help you estimate how long you might have left. For example, Fidelity cites this information from the Annuity 2000 Mortality Table: A 65-year old male has a 25% probability of living to at least age 92. And if he’s married, there’s a 25% probability that one person in the couple will live to age 97. The figures assume you are in good health.
Another point:
Historically, retirees have taken a conservative approach-investing primarily in bonds and CDs to avoid the volatility of the stock market and to keep cash relatively accessible. However, these “ultra-conservative” strategies can significantly reduce the opportunity for growing your assets during your retirement years, and eliminate the hedge against inflation that diversified stock investments offer. Note that diversification does not ensure a profit or guarantee against loss.
The inflation factor is often overlooked, but even a low rate, like only three percent, can have drastic effects on your savings. They warn “a retiree with roughly $72,000 of living expenses in 2003 would find they need nearly twice as much, over $150,000, to meet expenses 25 years later. Furthermore, some costs, like health care, may rise even faster than the general inflation rate.” And with health care costs rising and people living longer, the chances of needing long term care become more acute. They advise purchasing insurance to cover such possibilities.
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