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Retirees' Greatest Fear

Retirees' Greatest Fear

February 23, 2024

The biggest fear for retirees and those nearing retirement is the fear of running out of money. 

Here are 4 primary risks and a strategy to help manage these risks and alleviate your fear.

 

  1. Longevity Risk 

This is a question that is almost impossible to answer.  If you knew exactly how long you were going to live, it would be easy to determine how much money you could spend each month.

 Most people are surprised by the statistics provided by current insurance company mortality tables.  For instance, a 65-year-old couple has a 50% chance that one of them will be alive at age 91.

 Retirements lasting 20, 30 or even 40 years are commonplace and these longer time spans must be considered when planning for income.

 

  1. Inflation

Even as inflation has fallen from the COVID highs, it is still something that must be addressed during retirement.

At a 3% inflation rate, the value of a dollar decreases 25% every 10 years.  Even with decreased spending during retirement, inflation is a risk that must be addressed during your retirement years.

 

  1. Investment Risk

When you are investing money for long-term goals like retirement, market volatility can be your friend.  Investing during retirement requires a different game plan. 

One of the biggest risks you face when you start to draw income from your portfolio is called sequence of return risk.  This is the risk that you have negative returns the early part of your retirement income plan.

While it is not possible to avoid all investment risk in order to meet your retirement income goals, there are strategies available to help mitigate this risk.


  1. Behavior 

Of all the risks affecting a retirement income plan, one of the most damaging risks is behavior.  Many investors move money in and out of the markets based on fear and greed.  Typically, they will get out when markets have dropped and want to get back in after they have gone back up.  This leads to a sell low, buy high pattern and that can cause great harm to your retirement income goals.

 

  1. A Strategy to help manage these risks and achieve your goals.

There is a strategy that can help you mitigate these risks while at the same time, helping you live the life you have worked so hard to achieve. 

This strategy uses a time segmented approach to investing for retirement income that divides your retirement into bite sized time horizons.

We mathematically determine how much money will be needed in the short-term, mid-term, and long-term time horizons.  Then we can invest the money appropriately to meet the goals for each of these time horizons.

Short-term buckets are always placed in an account with NO stock market risk while the longer-term buckets are invested more aggressively to achieve longer-term needs. 

When the first bucket has been exhausted, the second segment is converted into a safe, no market risk account that will deliver income over the next time frame.

This strategy accomplishes several objectives. 

It eliminates sequence of returns risk by taking income from an account that has no market risk.

It helps lessen inflation risk by investing in long-term investments that can keep up with inflation.  It gives you the confidence to invest part of your portfolio more aggressively because you know your immediate income needs are covered by safe investments.

It helps you protect yourself from your emotions because you know, the buckets that are invested more aggressively won’t be touched for many years.  If the market drops significantly, you know you don’t need to panic because the segments that are in the market won’t be touched until years in the future.  This allows you to ride out the market swings knowing your short-term income needs are secure.

 

In Conclusion…

With 10,000 people turning age 65 every day, creating a reliable retirement income plan has never been more important.  If you or someone you know wants to talk about this, feel free to reach out HERE.  As always, thanks for reading.  KB