When we talk with people about their financial futures, we hear this concern more than anything else:
“What if I don’t have enough money to make it through retirement?”
In fact, 70% of Americans fear outliving their money in retirement more than death itself.
Think about that for a minute.
The closer you are to retirement, the more pressing the concern. You may not think about it while you’re working and getting a paycheck, but things change when you have to survive on your own.
It can be overwhelming. To prepare yourself, here are some big-picture risks that could make you run out of retirement money.
Longevity risk means outliving your assets. If this happens, you’ll have to change your standard of living, reduce your level of care, and, possibly, go back to work.
The average life expectancy of people who live past age 65 has steadily increased. This is great, but it can cause a real problem. As life expectancy increases, the risk of running out of retirement money increases.
For those couples who reach age 65, 50% will have one partner live past 92, and 25% will have one partner live past 96. That means one partner has a 1 in 4 chance of having to make it through 31 years of retirement.
This could prove a challenge for many who don’t have a source of defined income, like Social Security and pensions. This is income you can’t outlive, as it continues until you die.
But, if this income is insufficient to meet your needs, you’ll need to use other assets to supplement. Depending on the size of those assets, time may or may not be on your side.
Market risk is the possibility of an investor experiencing a loss due to market downturns. If you’ve had a 401(k), an IRA, or a taxable account within the last 10 years, you’re familiar with the roller-coaster ride of market risk.
Almost everyone remembers the pain of 2008. With the market volatility from 2018, it’s very possible we could see a repeat soon.
Interest Rate/Duration Risk
When you face interest rate or duration risk, you face the sensitivity of a bond’s price to a 1% change in interest rates. Current interest rates are extremely low, which creates two problems for you in retirement.
Low interest rates make it hard to generate fixed income during retirement. That’s because bond values decrease while interest rates rise.
This inverse effect on bond yields has been at the center of recent media attention. The Fed has raised rates and plans for more later this year. Bonds were historically considered a safe space, so this could become a real problem for retirees.
Retirees may also struggle with how to find decent returns without taking on unnecessary market risk. Many retirees get pushed into high-risk investments to achieve those returns, which is dangerous for them in the long run.
There are important risks to consider when deciding if your money will last through retirement. Taxes are generally the biggest expense for retirees. And there’s always that elephant in the room many people don’t want to discuss: health.
We see many retirement nest eggs affected by health problems leading to costly care. Whether it’s home care, assisted living care, or nursing home care, it can all add up fast.
With the national average cost for a nursing home topping $80,000 a year, it’s easy to see how this could devastate a portfolio without proper planning.
The key takeaway is to have a retirement income plan in place. Find a true retirement income planner in your area and see how your scenario holds up over time. If you want to know if you’re going to run out of money, a retirement income plan should be the first thing on your list.
Read the entire article by Rob Shepherd and Brad Buckler at Forbes.com.