Longer lives and better health translate into longer retirements and new concepts of what retirement should be. Many of today’s retirees view retirement as a time to shift gears but not necessarily to slow down.
However you define retirement for yourself, the bottom line is that you want to have enough money to live your life without constantly worrying that you’ll run out. It certainly pays to be prepared and to stay on plan.
What to look for
A successful retirement plan begins with making smart saving and investing decisions long before you contemplate retiring. But of equal or even greater importance is how you manage your money after you’ve left your primary career and begin to turn to your investments to provide the income that supports your lifestyle.
Here are five areas of risk to address when determining if your retirement savings will afford you a comfortable lifestyle.
- Timing and withdrawals: The amount you withdraw from your retirement portfolio and when you do so are two of the main determinants of how long the portfolio will last. For example, taking large withdrawals during bear markets such as those in 1973 – 1974, 2000 – 2002 or 2007 – 2009 makes it hard for a portfolio to recover and grow. To the degree possible, you want to minimize drawing on your capital in a weak market since you’ll have less capital for the rebound. Your annual withdrawal rate should be smaller than your average annual return less inflation.
- Market volatility: You need to position your portfolio to withstand inevitable swings in the market, and the way to do this is through diversification and asset allocation—holding a combination of stocks, bonds, cash and alternative investments that matches your risk profile. Returns on these investments should be non-correlated, so that when one area is down, another area is up.
- Longevity: The good news is that you have a good chance of living to a ripe old age, but you could outlive your assets. According to the Census Bureau, the number of Americans age 100 or older increased by more than 65% from 1980 – 2010, and the number of centenarians globally is expected to increase tenfold from 2010 – 2050. That means that if you retire at 65, you may need to plan for 35 years or more in retirement.
- Taxes and inflation: Don’t underestimate the ability of inflation to destroy spending power. Over the past 25 years, during which inflation has been fairly tame, the Consumer Price Index (CPI)—the cost of a basket of goods and services determined by the Bureau of Labor Statistics—has more than doubled. If inflation accelerates to 6%, prices will double in about 12 years.
- Health care costs: The CPI is often not the most accurate measure of your inflation rate, since you may spend disproportionately on health care as you age. These costs have traditionally run at double or triple the overall rate of inflation and are not under control. In addition, consider long-term care insurance as a way to help pay for some of the potential nursing home costs as you get older.
Writing the next chapter
Thanks to a combination of advances in medical technology and better lifestyle choices, Americans are living longer and more active lives. If you’d like to increase the odds that you will enjoy a financially-comfortable retirement, carefully consider these five risks and make adjustments as necessary so you don’t fall short.
This information is for general use with the public and is designed for informational or educational purposes only. It is not intended as investment advice and is not a recommendation for retirement savings. It is not our position to offer legal or tax advice. We encourage you to seek the advice of an attorney or accountant prior to making tax-related investment and/or insurance decisions. ©2017 Lincoln National Corporation
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