"Never before have American retirees faced such monumental risks when planning for retirement. Our extended life expectancy (commonly referred to as “longevity”) coupled with market volatility, sky-rocketing health care costs in retirement, and the inevitability of taxes and inflation have led many to wonder if they have enough funds set aside to last through their retirement.

Americans between ages 35 to 65 face a retirement savings shortfallof $3.83 trillion, with 41% of households projected to run short on money later in life.

To have a more rounded understanding of how to prepare yourself for retirement, here are three common risks that may greatly affect your retirement plan. 

LONGEVITY RISK

Advances in medicine and technology have improved our life expectancy. Today’s retiree could actually spend more time in retirement than in their working years. Our longevity exacerbates the other risks as we live longer and have more time to be exposed to them. A 65-year-old couple today has nearly a 50% chance that one member will live to age 93 and a 27% chance to age 97. Proper planning can dramatically reduce the risk of outliving your assets.

Part of longevity risk is accounting for inflation risk as the years go on. The consistent rising cost of everyday products and services can diminish your purchasing power. It’s the chance that investment income will not be worth as much in the future.

If we experienced 3% inflation, $50,000 of buying power today would be worth $23,880 25 years from now. Have you factored inflation into your retirement income plan?

MARKET VOLATILITY RISK

Look no further than our recent market history from years 2000 through 2003 or 2008 as an example of how volatility can devastate one’s retirement nest egg. Your greatest risk with volatility exists five years prior or the first few years of retirement. Furthermore, the risk of receiving lower or negative returns early in retirement when withdrawals are made from an investment portfolio is known as a sequence of return risk and it can be a retirement killer!

Let’s see the sequence of returns risk in a real-life scenario. Let’s assume you have $1 million saved at retirement. You start taking distributions of $50,000 each year during market years 2000 through 2003 when the S&P 500 price index lost -10.14%, -13.04%, and -23.37, respectively. In three years, the portfolio is now worth $512,830 after taking income each year. Can you afford to lose almost half of your savings in only three years in retirement?

The average retiree will likely face three to five bear markets in retirement. The average bear market lasts 14 monthswith an average loss of 33%. Does your retirement income plan have safeguards to protect you from deep market declines or bear markets? 

HEALTH CARE COSTS RISK

A 65 year old couple retiring today needs $285,000 to cover health care expenses throughout one’s retirement, not including long-term care expenses. Many think Medicare will cover most medical expenses in retirement, but it won’t. 

70% of people turning 65 today will need some type of long-term care (LTC) in their lifetime. The 2019 average annual cost for long-term care is as follows: nursing home: $89,000; home health care: $50,400; assisted living facility: $48,000.

Can your retirement plan withstand $285,000 in future health care costs as well as the potential for another $100,000-$300,000 in long-term care costs? Rising medical costs, our longevity, and declining employer-sponsored medical coverage make health care expenses critical for retirees and pre-retirees alike to manage.

What can you do to avoid these pitfalls? Thankfully, quite a few things. Here are some solutions to help mitigate these retirement risks.

Diversification

Create a retirement income strategy by diversifying your portfolio across many asset classes and vehicles ranging from IRAs to annuities, U.S. and international equities as well as alternative investments. Look to utilize low-cost index funds or ETFs in your investment portfolio to reduce fee drag and provide broad exposure to our markets. Have your funds properly diversified so your assets are not completely correlated to another. 

When you approach retirement, it’s time to shift your investments from growth-oriented stocks to more conservative portfolio strategies that include less volatile investments. 

Create your own pension plan

Since many companies today no longer offer pensions, it’s important you create an alternative income stream that you can count on for life. Utilize an annuity that will provide a guaranteed income stream you cannot outlive. Today’s annuities can offer valuable features such as no loss of principal, no loss of earned interest, a guaranteed growth rate regardless of market performance, and a protected lifetime income stream. 

Determine how much of your total retirement income you want guaranteed for life and not subject to market volatility by combining an annuity income on top of your Social Security.

Health Savings Account (HSA) 

An HSA can offer triple tax savings, where you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses and long-term care. 

Long-term care (LTC) hybrid insurance

Devise a long-term care expense strategy to help mitigate the extremely high cost of facility-based care. Take a look at LTC hybrid insurance policies that allow for a return of premium at any time and a death benefit if one dies before using the LTC benefits.  

Cash value life insurance

Cash value life can be considered the “Swiss Army knife” of financial products. Cash value life insurance can provide more than just death benefit protection to your family. Look into a whole life insurance as it provides a guaranteed dividend that will grow your cash value regardless of market volatility or choose an index life policy that provides returns linked to the S&P 500 with downside protection against market loss. As you build cash value, this money is accessible tax-free. 

Cash value life insurance policies allow you to add a long-term care rider to the policy, which gives you access to a portion of the death benefit to cover qualified LTC expenses. This will reduce the death benefit by the amount used for LTC expenses.

Nobody can predict the future! Without planning, a longer-than-expected life could easily lead to a person, or couple, outliving their assets. Acting now to mitigate your risks is critical to the long-term sustainability of your retirement plan. Educate yourself on these retirement pitfalls to help your financial longevity. Working with a financial professional can help you navigate this complex process and identify which risk factors may affect you.

This content was brought to you by Impact PartnersVoice. Investment advisory services offered through Ironview Capital Management, LLC, a Registered Investment Adviser. Insurance products and annuities offered through Bradley Jacob Rosen, FL insurance license #A300600. DT1041309-1220"

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