By Brad Cardwell
Some common retirement mistakes – such as overspending, investing too conservatively or veering away from your plan — are easy to avoid with a little discipline and forethought. Other risks, such as a health crisis or a market downturn, cannot be avoided, but they can be managed. Here are four of the most common dangers to your retirement strategy, and steps you can take to prepare for them.
1. OUTLIVING YOUR MONEY
Thanks to medical advances and healthier lifestyles, Americans are living longer than ever. That is great news, but it also creates the very real possibility that you might outlive your retirement assets—especially when 40 percent of people underestimate their own likely life span by five years or more, according to a 2017 Merrill Lynch study, “Finances in Retirement: New Challenges, New Solutions.”
You Can Do:
Think about delaying the age at which you claim Social Security. “By claiming at age 70 as opposed to 62, your monthly income could go up by 76 percent,” said Nevenka Vrdoljak, director of Retirement Strategies at Bank of America Merrill Lynch. Though you sacrifice income early on, knowing you will have higher Social Security payments in your seventies and beyond is like having “longevity insurance,” she said.
Find out whether an annuity might be appropriate for you. Investing in a lifetime income annuity could help you avoid the risk of outliving your retirement savings by providing a path to income for as long as you live. Because annuities come with certain costs and risks, be sure to talk to your advisor about all the pros and cons.
2. CHANGES IN MARKETS
If there is a significant market drop shortly before or early in your retirement—just as you are starting to tap into your assets—the value of your investments could shrink to an extent that undermines your retirement security. Even if the market subsequently improves, “If the first four or five years of your retirement are bad, it can be difficult to recover,” Vrdoljak said.
What You Can Do:
Take a second look at the way you invest. As you near retirement, shifting to a more conservative investment approach may help protect against market downturns. At the same time, it is important to consider maintaining some exposure to stocks to create a suitable balance.
Although quite low in recent years, inflation—even a modest percentage—reduces your spending power over time. People living in retirement are especially vulnerable. Over a 10-year period, a relatively low inflation rate of 2 percent can bring the value of every $100,000 saved down to $82,035, according to estimates made using the Bankrate.com inflation calculator.
What You Can Do:
Consider investments that could grow along with inflation. “That might be real estate or shares of stocks,” Vrdoljak said. If you have bond holdings, you may want to consider adding some Treasury Inflation-Protected Securities (TIPS). These government bonds offer returns that vary with the inflation rate. When interest rates go up, bond prices typically drop, and vice versa. “If inflation accelerates for whatever reason, you get compensated for that,” Vrdoljak said.
4. RISING MEDICAL EXPENSES
“When it comes to financial planning, people don’t systematically plan for health care risks,” Vrdoljak said. “In particular, it’s really important to take into account the possibility that you’ll need long-term care.” According to the Merrill Lynch study, 70 percent of Americans over 65 will at some point need that sort of care — which can include not just residence in a care facility, but help with daily activities like bathing or assistance with household chores. Even without such costs it’s likely that your health spending will increase as you age — and it’s important to note that Medicare does not fully cover these costs.
What You Can Do:
Plan early for long-term care. Some people may be able to pay for out-of-pocket long-term care or are able to rely upon grown children or a relative for assistance. But for many others, long-term care insurance may be the answer. If you do choose long-term care insurance, try to purchase it in your fifties—well before you need it. The cost rises as you age and may not be available if you develop certain medical conditions.
For more information, contact Merrill Senior Financial Advisor Brad Cardwell at 256-650-2432 or Brad_cardwell@ml.com.