Why Can Retirement be Risky?
By the time they reach retirement, most people have already been investing for 30 or 40 years, often rather successfully. Many even feel pretty confident in their investing abilities; they have built up a substantial nest egg in their IRA or 401(k). It’s very important to realize that once you are retired, investing is a different ball game, and there are new risks to be faced.
I see many people who don’t recognize these risks and continue using the same investment strategies they used when they were working. This can lead to additional challenges in retirement. Let’s look at some of the risks people may have in retirement.
Sequence Of Return Risk
OK, this is a fancy way of saying that if the market drops significantly when you are in or close to retirement, you can be at a greater risk of running out of money. You see, while you were working, you were simply putting money away at a steady rate. Let’s assume it was deducted from your pay each month and placed in your 401(k). You didn’t have to take money out for living expenses. If the market fell, you kept investing. In fact, when the market was down, your investment dollars that month bought more shares because they were “cheaper,” and when the market came back, you stood to gain, and your nest egg grew bigger. This is often called “dollar cost averaging,” and it can work in your favor while you’re still in the “saving” phase.
But once you retire and start taking money out each month, falls in the market work against you. You have to sell more shares when the market is down to get the same income. When the market comes back, that money is no longer there to grow. Your nest egg gets smaller. You could stand a good chance of running out of money.
Yes, this is a risk most people hope for: The risk that you will live too long. We are living longer, and our life expectancy keeps going up. About one out of four 65-year-olds today will live past 90.1 So, not only does your nest egg have to survive the ups and downs of the market, it may have to do that for another 30 to 40 years.
Of course, the government is planning on getting ahold of your retirement dollars. Depending upon your overall income, they may tax some or most of your Social Security. If you have money in IRAs or 401(k)s, they will tax it when you take it out. You may put this off for a while, but beyond age 70, they will require you to start taking out an ever-increasing percentage each year. If you leave it to your kids, they will then be taxed on it as they are required to take it.
There are a number of strategies you can use to help minimize the total taxes you pay in retirement, but I see very few people using them. Indeed, I often see them get advice to do just the opposite of what they should be doing. These are just three of the risks people may face in retirement that they didn’t during their working lives. As we plan for retirement, my clients and I look at what they can do to minimize or overcome these risks. If you don’t have a plan in place to handle those mentioned above, give our office a call (910-815-3100) so we can get together and see what might work for you.
1 Social Security Administration. “Calculators: Life Expectancy.” https://www.ssa.gov/planners/lifeexpectancy.html. Accessed Oct. 19, 2017.
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