5 Big Retirement Risks and How to Tackle Them

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Pat yourself on the back. You saved up, did the 401(k) thing, built up a nice portfolio. Maybe you’ve got a million, maybe more. Now it’s time to chill out, travel, play with the grandchildren, whatever. The point is, you’re done working.

And that could be the scary part!

Without that regular paycheck, you’ve got to make sure your savings last the rest of your life. But that could be two decades, perhaps more. You don’t want to deplete your nest egg, and you certainly don’t want to spend sleepless nights worrying about it.

But you’ve got this, and we’ve got your back. You have plenty of weapons in your retirement arsenal, it’s just a matter of learning about them and deploying them.

Here are some big retirement risks and how to address them.

1. Longevity risk

What it is: Longevity risk is the risk that you’ll outlive your savings.

Americans are living longer lives than ever before. In fact, the life expectancy in the United States is about 77 years, and folks on average are retiring before age 65. That’s a lot of nonworking years to make sure your savings last — and if you stay healthy, it could be a lot longer.

Severe fluctuations in the stock market could put a dent in your portfolio, and there are unplanned expenses: illness, housing repairs, a sick pet, you name it. And don’t forget inflation, keeping the price of everything on the rise.

What you can do: To create additional monthly income, consider annuities or a reverse mortgage. To conquer inflation, devote a portion of your savings to stocks and other investments likely to rise in value.

How an adviser can help: If you’re unsure of how much money you’ll need in retirement, talk to a financial adviser. A good adviser will help you define your post-retirement income, spending and plans for the future. Then, they’ll develop a clear plan.

The value of working with a financial adviser varies by person, but according to an independent study, people who work with a financial adviser feel more at ease about their finances and could end up with about 15% more money to spend in retirement.

Use this free matching service to connect with three qualified financial advisers in your area in five minutes. The first appointment is typically free.

2. Market risk

What it is: Market risk, also called “systematic risk,” is the risk the entire stock market declines, taking your savings with it.

That’s why investing in stocks, although they’re an important part of your overall savings, can be intimidating. While stocks have historically gone up over time, sudden declines of 10% or more aren’t uncommon. At the wrong time, that could be devastating.

What you can do: Don’t put all your eggs in the stock basket. Diversify. Ideally, your portfolio should be a mix of stocks, bonds and cash equivalents. Your ideal personal mix depends on your age, risk tolerance and other factors.

How an adviser can help: As you plan and invest for retirement, make sure you’re developing the right mix of investments. Talk to an investment professional. Even if you’re sure you’ve got it down pat, a review by an outside expert never hurts.

3. Health risk

What it is: The risk that health care expenses devour more of your savings than you planned.

Today you’re healthy, but unfortunately, sooner or later, especially as you age, the odds increase that you’ll need expensive medical treatment. Medicare will help, but it won’t pay for everything. For example, Medicare doesn’t pay for long-term nursing home stays, which cost an average of more than $7,000 a month.

According to a study by Fidelity Investments, today’s average 65-year-old couple will incur about $300,000 in medical expenses during their retirement years.

What you can do: The best defense to offset medical expenses is to be proactive by eating well, exercising and getting regular checkups. You could also consider long-term care insurance, which pays all or part of long-term nursing care. But it doesn’t come cheap and gets prohibitively expensive as you pass retirement age.

Another way to save for health expenses is with a health savings account (HSA). If you have high-deductible health insurance and are otherwise eligible, you’re not taxed on HSA contributions, your account grows tax-free and withdrawals for qualified medical expenses are also untaxed.

You can also explore Medigap and Medicare advantage plans. Both can lower your post-retirement health care costs.

How an adviser can help: Meeting potential health care challenges is critical and planning for them is complicated. Connect with an expert adviser for help.

4. Inflation

What it is: Inflation is when the cost of goods and services rises over time. It affects everyone, but it’s particularly dangerous for retirees, who lose the ability to earn more even as the cost of living goes up.

Consider this: In 1980, the average annual wage was $12,513. The average amount retirees need to fund their retirement was $125,134.

The difference between then and now? That’s inflation.

What you can do: Buy stocks, which carry some risk but which have historically greatly outpaced inflation. Real estate is also an inflation hedge, as are investments like TIPS (Treasury Inflation-Protected Securities), which adjust to keep pace with inflation.

How an adviser can help: New ideas and techniques to defeat inflation are being developed all the time, so make sure your bases are covered by talking to an expert, especially when you can get matched with an adviser in five minutes for free.

5. Tax risk

What it is: The risk from changing tax rules and policies.

Whether you’re still working or you’ve already retired, it’s important to do everything possible to keep income tax and other taxes from eroding your savings.

The federal government is continuously changing tax rules. For instance, the SECURE Act, passed in 2017, ushered in several changes affecting retirees. And more changes could be in store during the Biden administration.

What you can do: However and whenever the IRS rewrites the rule book, there are investment options and strategies to help cope with the tax burden, such as:

  • Municipal bonds, which are usually exempt from federal taxes
  • Wise use of Roth IRAs and 401(k)s
  • Tax-managed funds, which are designed to reduce your tax burden
  • Exchange-traded funds (ETFs), which incur less capital gains taxes than some mutual funds
  • Charitable donations of securities
  • Loss harvesting

How an adviser can help: While it’s illegal to evade taxes, it’s smart to legally minimize your obligations by understanding the rules. Enlist the help of a professional to make sure you’re not paying a penny more than you should and to plan how best to access your retirement accounts in the future.

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