Retirement is more than just money and rates of return. There are so many other risks that you have to be aware of. Here are some of the risks that go through our minds when we are consulting with a client regarding retirement:
- Longevity Risk. Most people are worried about dying too early and not being able to spend the money that they worked so hard to acquire. We’re concerned about what happens if you live too long and run out of money before you run out of life.
- Inflation Risk. It’s easy to look back and say that inflation is obvious in past years, but it’s difficult for people to look forward and visualize a time when their money may be worth less. If a person lives 10, 20, or 30 more years, some expenses can more than double over their lifetime.
- Excess Withdrawal Risk. All of a sudden, there’s a 4O1K or IRA that’s available for withdrawals, and a person may decide to go on that trip, buy a car that they have always wanted, or decide to give money to their kids while they are still young retirees. They don’t realize that withdrawing the funds too early can affect their future balances. The money may not be there in the future when they need it.
- Health Expense Risk. We have no idea what premiums are going to cost in the future, but we know historically that everything keeps on going up. With new technology, tests, and treatments, those expenses can be expected to keep increasing over time.
- Long-Term Care Risk. Everyone assumes they will be in perfect health until the day they die. Unfortunately, the way that it works is that we go from our go-go years to our slow-go years to our no-go years. Many of our future no-go years are going to require assistance.
- Frailty Risk. How often have you heard about someone falling and breaking a hip, and now they are no longer able to live on their own in their own home?
- Financial - Elder Abuse Risk. Unfortunately, financial elder abuse often occurs with someone who you thought had your best interests in mind. Is someone watching out to ensure another family member isn’t taking advantage of you?
- Market Risk. That can change on a day-to-day basis.
- Interest Rate Risk. I remember during the 1980s being able to easily secure a double-digit return from a CD. A person wouldn’t even really need to invest. Now, those rates are around 4%, which is a very different situation.
- Sequence of Return Risks. We all feel great when the stock market has done wonderful, but we feel very nervous about taking money out of the market when we are in the negative. Sequence of Returns is very different than the Average Rate of Returns and can have a huge impact on retirement.
- Force Retirement Risk. We hear about companies downsizing all of the time. Instead of you choosing the date, your employer may be choosing your retirement date.
- Re-Employment Risk. Let's say that you've lost your job and are looking for a new one. It’s much more difficult for someone who is a “senior citizen”, but very knowledgeable in the work that they do, to find a job for an extra 1-3 years to get them to the point where they want to retire.
- Employer Insolvency Risk. Companies are constantly going out of business. What happens if, all of a sudden, your company or your industry just folds? Do you have enough money to be able to jump-start a retirement if it has to be jump-started?
- Loss of Spouse Risk. What happens to your retirement plans when you lose a spouse? You may lose a pension or most of the other person's Social Security, depending on whether they were a high-wage earner or a low-wage earner. You may lose an income, but bills like real estate taxes, electricity, and gas bills are not likely to decrease.
- Unexpected Financial Responsibility Risk. What happens if your children come to you and need assistance to buy a house or help them through financial difficulty?
- Timing Risk. When do we get into the market? When do we get out? Do we time it? Do we not time it? How does that work out? Do we enter retirement at a low in the market, where maybe my balances are already lower than maybe they were 2 years ago, or am I leaving my job at a high, and then all of a sudden, my retirement is affected because of a drop in the stock market?
- Public policy risk. Public policy can be politics, regulations, or rules. If you thought the rules work one way and they suddenly change, they have just changed the rules in the game of life.
These are the things that we consider. These are the things that you should be discussing with someone who will test your knowledge and help you think about potentially uncomfortable situations in your future.
The reason that we plan for risks is so that you may have a long, enduring, and financially secure life. If that’s a goal of yours, then perhaps it’s time to schedule your Financialoscopy®.
