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.
Retiring Right
There are several smart moves we can make to get our retirement right. It’s one of those things in life we get only one chance at, so we’d better succeed! One of the best steps to take starts well in advance of reaching retirement age and that is to start early with a plan. We need to understand how economic cycles operate and take them into consideration. Boom and bust. Interest rates rise and fall. Inflation and devaluation. These are some of the trends that will affect whether or not we have enough resources to carry us comfortably through our “Golden Years”. So, as soon as you can, open all versions of IRA’s, 401K’s, and any other opportunities to save funds that come your way. If you can, max them out every year.
Some other important factors are to be aware of your longevity and not overestimating the amount of your savings that you will use to live on during retirement. The odds are 50-50 that one member of a 65-year-old couple will live to age 92. Too many don’t take advantage of insurance for long term care, something Medicare definitely does not cover.
You may have thought of your retirement financing in terms of the proverbial “three-legged-stool” with a pension, Social Security, and your own savings comprising the stability. You might want to consider the added strength that a continuing earned income would add, even if it’s from part-time employment. Another benefit might be better health care coverage, too.
Mid-Year Check Up Time
According to Rick Sauder, writing in the Fidelity Investors Weekly, it’s high time for a check up of your financial position. He suggests the following four steps for an easy exam of your financial plan:
- Assess your investment mix.
- Check the amount of taxes being withheld from your pay.
- Take advantage of all savings opportunities.
- Adjust for any major life changes.
Sauder suggests that “rebalancing your assets can help ensure that you aren’t taking on more risk or less potential for growth than you want.” He suggests reallocating assets in the mix whenever one of the is 20% or more over or under the target you already set.
Here are a few of the areas cited by the IRS in which changes in personal circumstances should prompt a fresh look at your withholding rate and legal matters such as your will and beneficiaries listed on financial accounts:
- Lifestyle changes: Marriage, divorce, birth or adoption of a child, buying a house, losing an exemption, or retirement.
- Job wages: You or your spouse start or stop working, or start or stop a second job.
Income not subject to withholding: Increased or decreased interest income, dividends, capital gains, or self-employment income. - Deductions: Increased or decreased deductions such as medical expenses, charitable giving, or education credits
Smaller Budget
Many of us were raised by thrifty parents who knew how to get a good deal, get it for you wholesale, or find great bargains. I know a woman who never buys anything that isn’t on sale. She learned that from her mother. Mine often did the same. She was a clothes horse with a shine for shoes that just wouldn’t stop. Every season we made the trek to the nearest large city for new shoes and clothing in the latest style. Fortunately for my mother, and all through my childhood, we were never without a sufficient income provided from my father’s hard work.
Recently, I’ve realized Daddy’s income was far more than sufficient. My mother taught me how to spend money wisely, but she didn’t give me a clue about how to NOT spend money. Did we live in a space and time warp of some kind? Many items I never gave a thought about purchasing (it was so automatic), I’ve discovered are dispensable. When the income isn’t even sufficient to cover basic living expenses, you can learn, the hard way, how to stop buying the items you just took for granted were part of housekeeping or generally living.
I’ve learned to emulate the New England ditty I learned when first married: use it up, wear it out, make it do, or do without. Especially the do without. Fabric softener and/or dryer sheets are not necessary. Store brands cost half the price of name brands and often work or taste just the same. I suspect that often they are the same product, different label. Some of the tricks to making this change are to shop with a list of needed items, and discipline yourself not to stray. Gradually substitute store brands to find ones that are adequate for your needs, and wean yourself away from the brands that support expensive advertising campaigns. Don’t tackle all items on your shopping list–maybe only one product a week.
Eventually your shopping list will narrow to the basic necessities, and then you’ll be able to recognize true bargains and take advantage of surprise sales you happen upon at the grocery and drug store.
The stress of finances
Recently I have been letting money stress me out beyond the limits of normal stress levels. I have decided to start a new career, in essence starting a small yoga business of my own. Now, I have been told (repeatedly, I might add) that it takes 2-5 years for a small business to take off. I understand that. I hear you. I get it. But I don’t like it. I am not a patient girl and I am used to nearly automatic success. This is not the case in small businesses and therefore not the case when it comes to my finances right now. So, I am stressing myself out (yes, I am aware that I am doing it to myself) about money intake and expenses. How do I fix this? I have some savings and, while I don’t want to draw upon them, at least I have a cushion in case of emergency. I’ve tried to put myself on a budget but the scary part comes when my income and necessary budget don’t exactly match up. It’s just hard to know what to expect to make when you are just starting out in a new career. So, aside from a fairy godmother sending me a great, big fat check (wouldn’t we all love that) it looks like a few more months (or possibly years) of trying to bring my yoga to my finances and breathe when I get stressed, try to remember that it will all work out in the end!