How to Manage Risk in Your Retirement - Rodgers & Associates

How to Manage Risk in Your Retirement

Navigating Risk

This week’s newsletter continues the series of the most frequently asked questions about retirement that I started in 2013 (see links to the other posts at the bottom of the page). Retirement is a big decision and most people want to get it right the first time. This week’s questions examine some of the biggest fears and concerns faced by people making the retirement decision.

What are my biggest financial risks in retirement?

Outliving one’s savings is the greatest retirement fear which has a direct connection to inflation. In a recent Transamerica Center for Retirement Studies survey, nearly half of U.S. workers’ reported that their greatest retirement fear is outliving their money and not having enough to meet basic family needs. The second biggest concern was the high cost of healthcare, needing long-term care and/or not having adequate healthcare coverage in retirement.

How can I make sure I don’t run out of money during retirement?

Start by making sure you have a good handle on what spending will look like after you retire. You need a plan to keep spending under control and the best way to plan is by using a budget. Look through your current expenses and note what will change when you retire, taxes, travel, health care costs, and other things that might affect your lifestyle in retirement. Ask a financial planner who specializes in retirement to look over your budget and help you think through future expenses your retirement lifestyle might incur. Many people make the mistake that their expenses in retirement will be similar to their expenses today. Some assume their expenses in retirement will be substan­tially lower since their mortgage will be paid off and they won’t have the expense of going to work. Unfor­tu­nately retirement can create new expenses that require planning.

I don’t want to live on a budget in retirement. Is this really necessary?

Of the many variable factors affecting your retirement — inflation, investment returns, taxes, cost of healthcare, Social Security – spending is one you have the most control over. Spending is the overlooked variable pre-retirees should pay a lot of attention to. The ability to control spending should be acquired as a prereq­uisite for retiring. Future earnings are often uncertain. The stock market could grow like it has in the past or not. Social Security could pay the benefits promised but it could also be changed. These are things we don’t have much control over. However, we can control what we spend our money on and therefore change how much we spend.

What is the best investment strategy to minimize the chances of running out of money?

Unfor­tu­nately there isn’t a “best” strategy to apply to every situation. Your asset allocation between stocks and bonds will depend on your other sources of retirement income – Social Security, pension, part-time wages, etc. – and the withdrawal rate you need from invest­ments. Asset allocation has a more meaningful impact on the sustain­ability of retirement income when investable assets produce a sizeable amount of income. When more than 50% of retirement income is being produced by invest­ments, asset allocation is critical to assure income grows to keep pace with inflation. Ideally, the assets will also be broadly diver­sified to give the portfolio exposure to invest­ments currently in favor. Rebal­ancing period­i­cally will help maintain the current allocation to avoid becoming over-weighted in any one asset class.

I’ve heard a way to secure future retirement income is to delay drawing Social Security. Is this a good idea?

In general, if you expect to live past age 81 it is better to delay drawing your Social Security benefits. This is because 81 is approx­i­mately the break even age when drawing benefits at age 66 as opposed to starting early at age 62 become equal. Social Security maximization strategies focus on the age to draw benefits and the sequence of who draws first when dealing with married couples. The objective is to get the most dollars from Social Security during your retirement. Life expectancy is just one consid­er­ation. See my articles “What You Need to Know Before Taking Social Security BenefitsPart 1 and Part 2 for other factors to consider.

See the other posts in the series here:

Rick’s Tips:

  • The biggest retirement fears are running out of money and healthcare costs.
  • Pre-retirees should create a retirement budget to assess what their spending will look like when they stop working.
  • An investment strategy should consider other sources of income to determine the right asset allocation.