Four risk factors to know when retirement planning
Americans are living longer than ever, and much longer than most retirement plans anticipated in the 1960s and 70s. But there is no shortage of “retirement planners” that seek to take advantage of this growing demographic. Unfortunately, not everyone who claims to be a retirement planner actually is.
How do you sort out the great ones from the good, or mediocre, or just plain bad retirement planners? It’s not enough anymore to trust your friendly neighbor or another person’s recommendation. When it comes to retirement planning, being knowledgeable about a few key things can help you make the very best decision when it comes to who handles your hard-earned money.
There are some risk factors your retirement planner should know about and discuss with you to ensure your income portfolio is sustainable.
1. A main concern with the financial industry’s overly optimistic view of how much retirement income you actually need relates to Equity Sequence of Returns. This means that when your portfolio provides returns is as important as what those returns are. Negative returns early in retirement are much more devastating than negative returns later on. You want to find a retirement planner that will help you avoid taking too much money out of your portfolio early on so that it can grow and work for you, and also avoid a portfolio that is too small and will not be able to take advantage of broad market growth over time.
2. Bond-Yield Sequence of Returns may sound like a lot of financial gibberish. All you need to know is that with a simple portfolio model of 50% bonds and 50% stocks, there is a high likelihood you will run out of money (57% chance, to be exact). This is due to the fact that many experts believe bond-yields will not revert to their historical average of 2.6% soon enough for many retirees. This means a negative return early in retirement, which, as discussed above, could be devastating to your portfolio.
3. Inflation is something we hear about all the time—what milk or bread costs, how the cost of living just keeps going up, etc. Unfortunately, it is not typically a part of the retirement conversation. Right now, we are in a moderate inflation cycle and while we hope that continues, many experts agree that it will not. Therefore, your retirement planner and plan should include necessary safeguards that will counteract the possibility of aggressive future inflation.
4. Life Expectancy is a difficult thing to discuss. In many respects, we all want to live a long time. At the same time, the amount of money needed for retirement, and the amount you can withdraw now, is more if you live for a shorter amount of time. Spin it how you like, but don’t underestimate your longevity, or you may very well run out of money.
5. Taking out a home mortgage is a common way to obtain funds, but it requires immediate and ongoing regular repayment. If you are looking for a better way to access extra funds as a retiree you have the option of taking out a reverse mortgage instead. When taking out such a loan you must understand that there are reverse mortgage disadvantages and advantages. For example, you will receive regular payments from the lender instead of having to make them, and you will be able to spend the money received flexibly based on your own needs and desires. However, if you wish to leave the home to your heirs you must repay the loan before your death or your family must pay the balance when you pass away.
It’s not your job to know the ins and outs of all of these financial terms. It is your responsibility to question your retirement planner on the various circumstances that may occur in the market and in life, and the safeguards they recommend.
Philip A. Rousseaux, ChFC®, CIMA®, RICP® is a published author and nationally recognized expert on retirement income planning. He has spoken at many financial trade shows in the United States, and is known for his objectivity, transparency, and honesty. He is rigorously independent, representing only the major insurance and financial companies that meet his uncompromisingly high standards. In 2014, he was named one of Retirement Advisor’s Advisor of the Year Finalists. Judged on production, community involvement, an ability to connect with clients, a passion for working with seniors, and an exemplary compliance and suitability record, Philip was one of only five finalists selected from across the country. Philip formed Everest Wealth Management in 2003 with the belief that there should be a uniform strategy and philosophy to help clients meet their goals while providing guarantees for retirement savings. Philip received his B.S. in Economics from Towson University and completed an Executive Education Program at the Wharton School of Business. In his spare time, Philip enjoys traveling to other countries and experiencing other cultures. He is also a PADI Rescue Diver and a loving husband to his wife, Lorena. Philip enjoys volunteering his time with the Make-A-Wish foundation along with the rest of the Everest team.
For the best chance to retire on your terms start saving/investing early in life and be consistent (save with every paycheck). Taking advantage of a matching 401k plan should be a no brainer. The power of compounding is lost on many people. Also maxing out contributions when possible, eliminating debt, avoiding risks with your nest egg, planning for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.) and making catch up contributions once you reach 50 should all be part of everyone’s plan. And work at staying healthy to reduce illness, injuries and medical costs. I recently found the site Retirement And Good Living which provides information on all these issues as well as many other retirement topics and also has several retirement and health calculators.