In today’s volatile market, there are many people – both retired and almost-retired – who are concerned about overcoming financial risk in retirement. With near-daily stock market swings of several hundred points (or more) in either direction, it can be difficult at best to know if your money is really safe.
As Baby Boomers inch closer to retirement, most are becoming less concerned about aggressive growth opportunities, and more tuned in to making sure their money will last for the long-term. In fact, today, having enough money to last a lifetime is the top retirement goal for two-thirds of investors.
Financial Risks to Be Mindful of in the Future
One of the most important steps you can take in planning for retirement is developing an income plan. But the amount of income you can count on – as well as how long it may last – can depend on whether or not you hedge several significant risks.
One of the biggest of these is outliving your assets. While our longer life expectancy means we can spend more time with the people we love, it also means that your retirement income needs to last for a much longer period of time.
According to the Social Security Administration, a man who is age 65 today can anticipate living, on average, until age 84. A woman who is turning 65 today can expect to live, on average, until the age of 86.5.
These figures, however, are just averages, and one out of every three 65-year-olds today can expect to live past the age of 90, with roughly one in seven anticipated to live beyond the age of 95.
If you are that “one,” it could mean that you’ll actually spend more time IN retirement than you spent savings and planning for it. But there are other risks that you need to be mindful of, too.
One is the low-interest-rate environment that we’ve been living in for more than a decade now. In fact, interest rate yields have actually been trending down for more than thirty years now, hitting an all-time low of 1.37% in 2016.
That means putting $1 million into “safe” money options will generate less than $14,000 per year in retirement income. Is that enough to maintain your living expenses during what could be a 20 or 30-year retirement?
Coupled with low-interest rates is the extreme market volatility that could literally wipe away years of savings within a very short period of time. If you had money in the market during the recession of 2008, it could be that your portfolio still hasn’t recovered. So, ask yourself, if another recession was around the corner, would you be able to maintain a livable income from what’s left?
Yet another risk that can impact how long your assets will last is the order, or sequence, of returns. While you may have been focused on the “average” return on your money during your years of accumulation and saving, what happens with your portfolio over the last few years before retirement, and the first few years after can have a significant impact on if or when your money will run out.
Take a look at an example. Using two portfolios with an initial investment of $100,000 and a 9% annual withdrawal rate for each, both of the portfolios shown below had an AVERAGE overall return of 7%.
So far, so good.
But, because the Portfolio #1 had a negative return in Year 2 as versus Year 3, it was depleted six years earlier that Portfolio #1 – even with all other factors being equal.
Sequence of Returns Example
| Portfolio | Year 1 | Year 2 | Year 3 | Ave. Return | Years Until Depleted |
| #1 | +7% | -13% | +27% | +7% | 18 |
| #2 | +7% | +27% | -13% | +7% | 24 |
Source: Government Accountability Office, June 2011
With that in mind, once you start taking withdrawals from your portfolio, it is important to be mindful of not just the average returns on your funds, but also the order of those returns – especially those in the early years of your withdrawals.
On top of that, inflation and rising prices are also included in the risks you can face in retirement – and if you don’t plan ahead for it, you could find that you are unable to maintain your lifestyle, and may even have to forgo purchasing some of the items and services you need and want in the future.
Even at an average inflation rate of just over 3%, your income would have to double in 20 years in order for it to just stay even with what it is today. Does your current retirement income plan provide you with that assurance?
Making Sure Your Money Stays Safe in Retirement
Even with the many risks you can face with your retirement income, there are ways that you can plan ahead, and keep your money safe. By incorporating an annuity into your income plan, you can be assured that you will receive a set amount of income for a pre-determined length of time, or even for the remainder of your life.
In addition, many annuities offer other assurances, too, such as rising income over time to help keep pace with inflation, a death benefit for a named beneficiary, and/or penalty-free withdrawals if you are diagnosed with a terminal illness or you need to reside in a skilled nursing home.
But not all annuities are exactly the same – and if you choose the wrong one for your particular objectives, it can turn out to be an expensive mistake. That’s where the Annuity Gator comes in.
Our focus is on making sure that consumers understand annuities and how they work BEFORE making a long-term commitment to one. We can help you to narrow down the annuity that works best for you and help you to anticipate performance.
Already have an annuity in your portfolio?
If so, why not let us take a closer look and see if it’s performing the way it is supposed to be. Just
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