The stock market and personal health are two common things people tend to worry about during their retirement years.
Visions of being forced to move in with their children, a lack of savings and real estate prices can also cause anxiety. While those retirement risks may be top of mind for some, they may not really be the largest threats to financial freedom.
1. Risk of Living too Long
This probably seems like a good thing since we all tend to hope for of a long, happy and healthy life. However, there are a few reasons why living too long can be a problem. Inflation is the first reason because the cost of living increases the longer you are retired. This also means retirement savings will need to last for a longer period of time.
Many people often underestimate how long they may live. Keep in mind that “life expectancy” is just the average of how long people live. Some won’t live that long, many will live to at least life expectancy while others will live past that age. Most of us don’t really know in which group we land. It’s difficult to know because there are heavy smokers living long lives, while at the same time, healthy folks who don’t even make it to retirement.
The real detriment of living too long occurs when people outlive their savings. People often ask, “How long will my money last under this retirement plan?” I always encourage them to set a goal of never running out of money. I’ve spoken with many people who said they would be fine as long as they didn’t live past the age of 78, 80 or whatever age they calculated. Living solely off Social Security, in your eighties, won’t cut it for most people.
You might think that this risk, which is essentially the likely possibility that you could live much longer and spend a lot more time in retirement than expected, would be an issue only after you have chosen to retire. However, it is also a problem for those who put off saving for retirement.
Retirement saving procrastination, or the assumption of working past the standard retirement, isn’t always a wise choice. Assuming you have until age 70 to save will likely result in saving less, or starting later, thereby making it exponentially harder to achieve financial freedom.
No one knows the exact day they are going to die but looking at your family history and personal health can offer some insight into how long you may live. You can also do a little digging for the average life expectancies of people in your age range. Keep in mind that the longer you live the more likely you are to make it to older ages. For example, a 79-year-old is more likely to live to 80, than a 40-year-old, on average.
2. Risk of Being Complacent
Let’s assume you opened a 401(k) and have made regular contributions throughout the years. Perhaps you invested money into a default fund, at the default rate never really thinking about it again. What else is there to do to reduce retirement risks? If you received raises over time, you will likely need to increase your contributions to retirement accounts.
The nine-year bull market has caused some to become complacent about the risks of the stock market. Unrealistic expectations for stock market returns, over the long term, have also resulted. While your nest egg may be growing nicely, are you actually on track for your various financial goals? If any of rings true for you, complacency may be a risk to your retirement.
Increasing retirement balances may lead you to a false sense of financial security. A record number of Fidelity’s 30 million 401(k) accounts have achieved a balance of more than $1 million. In 2018, 168,000 workers are at or above that milestone, up 49,000 from the 2017 total. Those savers should be proud, but be careful of falling for the hype of this milestone. One million dollars isn’t what it used to be. A million-dollar 401(k) likely won’t allow many American taxpayers to maintain their pre-retirement standard of living without other income in retirement. I think it’s also fair to assume that many those who have a million-dollar 401(k) balance make more (often much more) than the average American.
I’m a big fan of set it and forget it when it comes to retirement planning. That’s assuming someone like a financial planner is managing it and advising you when more savings are needed or perhaps times when you can capitalize on tax law changes. If you are handing this yourself, make sure to check-in periodically to make sure you are staying on track for your personal retirement goals. Are you getting your full employer 401(k) match? Should you increase your contributions amounts and is your investment performance keeping up with your expectations?
3. Risk of Forgetting About Emotions
People tend to ask me questions and want answers in terms of what they should do based on some mathematical formula. Many major decisions in retirement plans are more about emotion than math. For example, “How much house can I afford?” is a math question. “Where should I live?” is an emotional one. Budget may play a role in those situations, but I digress.
Many other choices are easy when times are good but rough when times are tough. Putting money into the stock market is much easier when the market is performing well. Keeping it in there when times get tough, or just seem tough, can be much more difficult. Having worked through the financial crisis, I have saw first-hand the anxiety and fear people experienced. Today, now nine-plus years later, I can see the great results of people who stayed the course and kept working towards their financial goals.
I have also seen the compounding negative effects on people who sold out their entire portfolios because their emotions got the best of them. Years of life savings, sitting in cash, will not allow many people to retire comfortably. There are a few people out there who have an amazing knack for calling the peak and troughs of the financial markets. Sadly, they seem to sell low at the bottom and then buy back in “high” at the peak. I think we all have learned by know you can’t actually time the stock market. Bad news about the market has a way of wearing on even the most confident investors. However, skipping just a few months, let alone years, of investing can greatly decrease your income in retirement.
Try to have a written retirement plan. It doesn’t have to be complex or extensive to be valuable. Simply outline your goals of when you want to retire and what you need to do to get there. Ideally, you can add an asset allocation strategy to stick with when times are good and bad. That will hopefully reduce the chances of continuously chasing returns with your investment choices or only putting money in when times are “great.” Set it and forget it but check in, say yearly, to revisit contribution levels and make sure you are still on track. If this seems like too much to do on your own, consider working with a fee-only Certified Financial Planner.
David Rae a Certified Financial Planner™ and Accredited Investment Fiduciary helping people make smarter financial decisions since 2003. Investopedia has name David one of the “100 Most Influential Financial Advisors” for 2017 and 2018.
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