PTBOCanada Featured Post: Matthews + Associates
/Matthews + Associates helps their clients to set clear goals for their retirement, then works with them to achieve those goals for a stress-free retirement.
When it comes to retirement, there are many intimidating questions you may have.
How long will I live? What will my health be like? What happens if the market crashes during my retirement? These are some very real questions that could impact your retirement planning. Here we address the five major retirement risks in terms of what they are, and why they matter.
The 5 major retirement risks are:
1. Sequence of returns risk
What it is: The sequence of returns risk is the yearly variation on your returns. It can pose a risk to your overall portfolio value.
Why it matters: Despite the average return of your portfolio throughout retirement, hitting low returns early in retirement can deplete your portfolio making it difficult to sustain your lifestyle.
Going deeper: Assumptions around inflation and longevity risk (i.e., how long you will live) are often used to create a projection that determines how much money you will have to live on. Projections assume a stable average return each year; reality tells us that we rarely see anything near average from year to year.
2. Longevity risk
What it is: Longevity risk is the risk that you may outlive your money.
Why it matters: Running out of money mid-retirement could harm your life, health, and well-being.
Going Deeper: Many people significantly underestimate how long they will live. If you run out of money at 85 years old, but go on to live another 5-10 years or more, what will your quality of life look like? Who will take care of you? Where will you live?
3. Risk of being too conservative
What it is: The risk of being too conservative, also called asset allocation risk, happens when you over-allocate investments in your portfolio to low-risk, low-to-no-growth assets.
Why it matters: By allocating most or all of your portfolio to low-risk assets, you may run out of money because you’re not generating the necessary growth to keep your lifestyle up with the increasing cost of living.
Going Deeper: People often assume that they should only hold low-risk assets in retirement because of a perceived shortened horizon. To maintain your portfolio value, you will need growth investments in your portfolio to keep ahead of inflation over the long term.
4. Inflation risk
What it is: Inflation is inevitable and with that comes the risk that you will lose some of the value of your money due to the future increase in the cost of goods and services.
Why it matters: When your portfolio loses value, you will have less spending power or struggle to keep up with your desired lifestyle in retirement.
Going Deeper: Inflation, generally, happens each year and over a full retirement the impact is substantial. To put this in perspective, someone spending $80,000 per year in 1980 would need $160,000 to maintain the same lifestyle in 2022.
5. Risk of healthcare expenses
What it is: Some retirees may find that they need more healthcare in their retirement years, only to discover that their portfolio may not be able to support it.
Why it matters: To live with independence and comfort – or even to die with dignity – necessitates that you account for the risk of healthcare expenses.
Going Deeper: The risk of healthcare expenses comes down to two things:
The unpredictability of your health and future healthcare needs and expenses.
The unpredictability of the government’s future funding and coverage.
Mitigating Retirement risks:
There will always be some risks associated with retirement planning and striking a balance is a necessity.
To mitigate retirement risks, remember:
Retirement projections are not plans. They’re based on assumptions and need to be used as a starting point only.
Retirement planning needs to include a strategy to handle potential fluctuations, dips, and market corrections.
Correct asset allocation can significantly mitigate risks like inflation, longevity, and healthcare expenses.
Being realistic about longevity in retirement planning; using data and statistics is important to remain objective when making decisions.
