Common Risks in Financial Planning Retirement
Retirement is a dream most people have starting early on in their lives — the amazing opportunity to live without having to work for your money. Retirement requires years of work, planning, motivation and saving, and finding yourself in a position to retire is a tempting thing to be faced with. Though the benefits of retirement almost need not be said, there are lots of risks involved as well.
Several factors can negatively impact your retirement, and it’s important to understand what they are and how you can avoid them.
The Downside Of Living Longer
Of course, there is really no downside to a long life at the end of the day. Financially, however, many retirees fail to compensate for exceeded life expectancy when calculating their retirement savings and needs.
“Long lifetimes are difficult to predict for individuals,” a recent Society of Actuaries report stated. “It’s easier to predict the percentage of a population with a long life than to predict this for an individual.”
In a time when the average life expectancy is 78 years old, with women generally outliving men, it’s important to factor in the possibility of living several more years than you might be inclined to plan for. Longevity truly is major risk to retirement and is also a very tricky thing to account for, because you never truly know how long you have.
Several options are available that are designed to protect retirees from outliving their finances, including reverse mortgages and something called longevity insurance — annuity that doesn’t begin to pay benefits until an older age like 85.
Inflation: A Wildcard For Retirees
Something to consider when thinking about retirement needs is inflation. Because retirement requires a fixed income, it’s imperative that inflation be taken into account. As the price of goods and services increase, even at relatively small inflation rates, your retirement income can take a severe hit very easily and ultimately decrease your purchasing power.
Similarly, it’s crucial that you position your retirement investments for growth and avoid ones that are both too conservative and too aggressive. Investments that are too conservative can put your retirement portfolio at risk of inflation and therefore diminish the amount of money you have available to live on.
It’s also important when it comes to accounting for inflation, interest rates and investments that you take money from your savings using a conservative withdrawal rate. Spending too quickly and too often can seriously put your retirement in danger.
Financial Personal Risks
There are also personal, life-related risks that come into play aside from longevity. One of the biggest risks to retirement is death of a spouse. Not only is it a traumatic event for anyone, let alone a retiree, it can put your finances at risk.
If your spouse was the primary pension holder or breadwinner in the home, death can cause a reduction in benefits for you as a spouse. This is why estate planning is important and life insurance is a smart investment.
There’s also the issue of unplanned needs on the part of family members. Sometimes, family members encounter certain unexpected hardships that require a retiree’s financial assistance. This is why it’s important to plan for such events when saving for retirement. Put money in an emergency savings account dedicated to helping family if situations ever arise.
No matter who you are or what kind of financial situation you’re in when you enter retirement, keeping the risks in mind and accounting for them when planning your life can go a long way to ensure that you’re able to live comfortably and that you have a better chance of your money outliving you. Plan accordingly, and retirement can be an enjoyable time to enter into, without the stress of risks.