A happy and prosperous retirement is what you look forward to during the decades you spend working and saving. Yet your retirement future can be unpredictable. You might not have as much time to save as you had expected, your expenses in retirement might be higher than planned, and your income could be lower in retirement versus your working years. And, with today's volatile financial markets, expecting steady, reliable growth of your nest egg can be a risky proposition.
Although the road to a comfortable retirement is full of uncertainty, the good news is that you don't need to predict the future to be able to prepare for it. You have the power to make decisions today that will directly impact how you live tomorrow. With that in mind, here are four risks that may impact your retirement and suggestions on how you can address them, whether you are still building up your savings or have already begun drawing them down.
1. Inflation
The longer you are in retirement, the greater the impact inflation is likely to have on the purchasing power of your money and, therefore, your lifestyle and finances. For example, if you had $100 in 2004, inflation would have reduced the purchasing power of that $100 to $77.46 by 2014.[1]
In addition, retirees are subject to a phenomenon known as senior inflation. That's because retirees tend to more frequently purchase inflation-sensitive goods and services such as medication, hospital services and other health care arrangements, while younger consumers are more apt to spend on things like electronics, clothing and housing.
2. Market Volatility
Over the very long term, and historically speaking, investing in the stock market has provided the best opportunity for growth. But over the last 15 years there has been substantial volatility. In fact, during the last 14 years, the S&P 500 Index has been chopped in half twice![2] And timing and luck could play a large role in whether your portfolio is poised to provide the necessary income needed in retirement. A market downturn when you're two to five years away from retirement is something that may be difficult to recover from in time to keep your retirement plans on track. Do you have the time to weather this volatility and the risks that come along with it?
3. Longevity
For pre-retirees and retirees, living longer can bring the inherent risk of outliving your assets. According to the National Retirement Planning Coalition, if both you and your spouse are now 65, there is a 50 percent chance that one of you will live to age 85.[3] Today's retirees need to ensure that their retirement income can last at least 20-30 (or even more) years past their retirement date, a significant increase from just a generation ago. Furthermore, not properly accounting for longevity risk can dramatically impact quality of life in retirement, forcing retirees to accept a lower standard of living, reduced care or potentially going back to work.
4. Interest Rates
Traditional advice has said that as you approach retirement you should reduce your exposure to stocks and increase your allocation to more conservative fixed income investments, such as bonds and bond funds. Indeed, over the past three decades, falling interest rates have resulted in strong historical returns making these "fixed income" investments attractive to investors. Why? Because bond fund prices rise as bond interest rates fall. But bond interest rates are at historic lows. According to recent guidance from the Federal Reserve, there is an expectation that they will increase the federal funds rate at some point during 2015. If this happens, it is possible your fixed income investments could decline in value, meaning you may need to save more to create adequate retirement income.
Retirement planning certainly comes with its challenges, but you can take steps now to help ensure you have resources you can rely on later. A first step is simply creating a written plan. This can boost your confidence and make abstract risks and fears seem more manageable. According to proprietary consumer research we recently conducted at Genworth, those with a formal savings plan and a formal plan for taking income from their assets in retirement are significantly more likely to feel confident that they will be able to meet their financial goals compared to those who have not taken as many formal steps toward retirement planning.[4]
Start by outlining your goals and objectives, taking into account some of the more predictable risks such as inflation or living longer, and build in a savings cushion accordingly.
Next, make sure you have a well-diversified portfolio that can potentially protect against, or benefit from factors like market volatility or interest rate movements. Consider income-oriented vehicles that don't lose value in times of rising interest rates and that can supplement your Social Security and/or pension payments once you retire. An annuity might be part of this solution. Depending on the type, they can provide a guaranteed stream of lifetime income and protect your principal, regardless of what markets or interest rates do, making it particularly relevant in a world of uncertainty.
While there are a number of potential risks to consider and planning for them may seem daunting, a fulfilling retirement may be within reach. The fact of the matter is that the more prepared you are, the better off you'll be. Talk with a financial professional to learn more about the options available to you, and how they can help increase your income and protect your retirement lifestyle.
For more retirement planning tips, go to Let's Talk: Retirement.
[1] 2004-2014, through May 2014 as published by the US gov't 06/17/14
[2] S&P 500 Daily Index 3/24/00-12/31/13
[3] RetireOnYourTerms.Org, "The Phases of Retirement"; 04/21/15
[4] Genworth's 2015 Future of Retirement Income Study
