The Biggest Risk To Your Retirement
- December 21, 2018
What is the number one risk that you face financially in retirement? There are a lot of risks. But, there’s one risk that drives every risk, and that is longevity risk.
People are living longer and longer lives. If you’re a married couple, both age 65, do you know what the average life expectancy is until the second spouse dies? It’s 29 years. In other words, it’s average that one of of two of you will live to be 94 years old.
Think about all the risks that we could have to our money and our lifestyle in retirement. If we knew we were going to die when we were 76, it’d be easy to plan financially for your future. But we’ve got a plan for longevity. And there’s a danger zone if you live to see 96 to 100 in the pressure that puts on your nest egg. It’s not all about just figuring out how to invest your money. It’s about how you take that life savings and convert it into dependable, increasing income that lasts at least as long as you do,. You don’t want to run out of money before you run out of life.
We’re in a tough investment climate right now: stocks are expensive bonds are expensive. I don’t know what’s going to happen in the next year. But if I’m looking out 10 years, there appear to be challenges in the investment climate. Jack Bogle, the former chairman of Vanguard Group, is predicting that the US stock market over the next 10 years will average about 4% per year. He’s said that bonds will be a little bit less than that at 3.5% per year. And there are a lot of economists that agree with that. Now, he could be wrong.
But what if he’s right? How do you structure your money to last longer than you do? It’s not just about how invest the money, it’s how you structure income. Where do you pull your income from when markets are down? You don’t want to spend investment losses. You don’t want to sell and then spend that money as income, because then you’ll compound your losses.
What about Social Security election? The choices you make could potentially be worth over a couple hundred thousand dollars in extra money over your lifetime. You need to understand how widow and spousal benefits work, how divorced spouse and divorced widow benefits work.
Then there’s tax planning. Minimizing income taxes could be a big way to bolster your after-tax return over the next 10 years. If the markets don’t make as much, you can make more after-tax with effective tax planning. There’s health care planning. What about health care costs and catastrophe? There’s estate planning. What type of legacy do you want to leave for your family? A comprehensive financial plan has all of that stuff together.
If you’re just focused on what mutual fund you buy, you’re doing yourself a disservice. If your financial advisor is focusing just on what mutual fund to buy, its a disservice. What do you need your money to accomplish for you? What are the specific outcomes you desire? How do you use all of these things – investment planning, income planning, Social Security election, tax planning, health care planning, estate & legacy planning – to make sure you accomplish the outcome you desire?