By Jim Sandager, April 10, 2017, DesmoinesRegister.com
Navigating retirement is difficult. What makes retirement planning so challenging is that there are so many unknowns that you need to prepare for, including the length of retirement, your spending needs and the performance of your portfolio.
These myriad of unknowns produce specific risks that can jeopardize your financial future. Fortunately, the chances these risks sabotage your retirement can be lessened with a bit of proactive planning. Today, I want to focus on three risks that can jeopardize your ability to sustainably spend in retirement, and what you can do today to prepare for them.
If your retirement happens to last 20+ years, there’s a good chance you’ll experience a market downturn at some point. Sequence risk is the risk that there’s a market downturn early in retirement rather than later in retirement. Imagine you’re retiring with $500,000 in savings and need to withdraw $100,000 living expenses after the first year and $0 after the second year. If the markets have a great first year and return 50%, you’d have $650,000 after your spending needs. If the markets drop 33% the second year, you’d wind up with $435,500.
Now let’s flip those results and assume a 33% drop after the first year and then a 50% gain the second year. In this scenario, you’d have $352,500 remaining. In other words, because you were unlucky to retire in a bear market, you have about $80,000 less than the person retiring in a bull market. That’s why you need to have an adequate amount of money in less volatile investments to weather a rocky market.
No one knows how long retirement will last. Because of this uncertainty, it’s better to take a more conservative approach and plan for a retirement that could last into your mid-90s (or maybe even longer!). As we continue to live longer and longer, it’s important to continue to have a portion of your portfolio allocated in stocks. Historically, equities have been great at outpacing inflation, and it’s these long-term gains that will be critical in preserving your savings and spending power throughout retirement.
Risk of Unexpected Expenses
Unexpected expenses may not be unique to retirement, but how they impact you is. When you retire, your income is relatively fixed. Every time you need to increase the amount you’re withdrawing in order to pay for a large unanticipated expense further endangers your long-term financial security. When thinking about your retirement spending plan, make sure you have an outlet to tap into so that it doesn’t wreak too much havoc on your overall financial plan.
There are key retirement risks outside of the realm of spending that you need to be ready for (I’ll touch on those in my next column). That said, preparing for these spending risks is a fundamental tenet of financial planning. Having a plan to better ensure sustainable spending is a key to accomplishing the goals you have for your retirement.
To Your Successful Retirement!
Michael Ginsberg, JD, CFP®