Retirement risks

By Kevin Theissen

Foundationally, what most people want is to maintain their standard of living now and into the future. This is especially true in retirement which could last several decades for many. While there are multiple potential risks and every situation is unique, the most common concerns include stock market downturns, outliving one’s money, inflation, and long-term medical expenses. These are valid concerns, but all can be prepared for with proper planning.

Investing in the stock market is a great way to build long-term wealth. You should also expect and plan for inevitable downturns. When these downturns, corrections or bear markets happen in retirement, they can be painful because you have less time to make back what we lose in a downturn. The best way to protect your investment accounts is to make sure you have a diverse asset allocation that matches your risk tolerance. As downturns happen, you can look to rebalance and even buy in with a long-term focus. Also, if you keep a year or two of living expenses in cash, you won’t have to sell out during down market conditions.

As life expectancies continue to increase, your retirement years might last three or four decades. It has been said that the child has already been born that will live to 150 years old. The risk that comes from living a long life could require saving more and holding more in stocks for long-term growth to fight inflation in these additional years. You should consider filing for Social Security benefits at least at full retirement age or even delaying age to 70. You should also be focused on keeping a manageable budget and reducing expenses. Be careful of brokered financial products like “guaranteed” annuities and reverse mortgages – as these are often sold to people that don’t always know what they are getting into.

The silent killer of inflation is often overlooked but can have a significant impact. Consider: A 3% rate of inflation will cut your purchasing power by 26% after 10 years and 45% after 20 years. Put another way, with 3% annual inflation, $500,000 will have the purchasing power of about $280,000 in 20 years—or even less if inflation is higher. This is most important for those on a fixed income. So you need to keep at least a year’s worth of expenses safe and available but also need enough in stocks to fight inflation over the long-term.

Medical and long-term care expenses are potentially one of your largest expenses in retirement and the cost has increased even more than the rate of inflation. The average cost of a nursing home is approximately $100,000 and home care averages around $50,000 per year. So it’s obvious to make sure you have good health insurance and to plan for long-term care whether or not that includes long-term care insurance.

To maintain our standard of living now and through our retirement years — it just takes some planning to maximize what we have and avoid the major risks.

Kevin Theissen is the owner and principal of HWC Financial in Ludlow.