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5 Dangers to a Successful Retirement

Navigating the biggest financial risks

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You’ve worked hard to achieve or approach financial independence. But there are always risks and, according to the Center for Retirement Research at Boston College, here are the five largest risks we face in retirement, as described by the center in order of how it views the greatest risks.

  1. Longevity risk: Living longer than expected and exhausting one’s resources.
  2. Market risk: Since most people now save through 401(k) plans, retirees face the risk associated with market volatility. They also face risks in the housing market, because few downsize after retirement.
  3. Health risk: Retirees also may have unexpected medical expenses and long-term care needs. Out-of-pocket expenses rise quickly with age, and health costs in retirement have increased substantially over the past few decades.
  4. Family risk: This risk, which has received increasing attention, includes divorce, death of a spouse, and adult children becoming ill or unemployed. This risk might be harder to manage than the longevity, market, and health risks, because it could have an effect over a longer period of time.
  5. Policy risk: Social Security is the primary income source for most retirees, and the program’s trust fund reserves are projected to be depleted in 2033. Therefore, without any policy changes, everyone would experience a 20 percent benefit reduction after that point.
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Mitigating these risks

Much as I wish I knew how to eliminate these risks; all I can do is offer some thoughts on how to reduce them.

These risks, of course, can build on each other. For example, we could have a very long life on top of a market plunge.

So here are some things you can do today to manage these risks.

First, and most obvious, is that the best way to protect from running out of money is to spend less. While you should enjoy the money you’ve worked so hard for, the cost of running out of money is higher than the cost of dying with some.

Consider these 4 tips

Lower consumption

Take a look at your spending over the past year. Perhaps your credit card company allows you to view online the expenditures categorized by type such as travel, groceries, and entertainment. Then think about what purchases didn’t bring you much in the way of happiness. Perhaps you are even making recurring payments to a service you rarely or never use. Figure out what expenditures you can cut with little or no pain.

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Get more for your money. The internet makes it easy to comparison shop. Sometimes a few clicks in a few minutes can save you a bunch of money. AARP’s 99 Great Ways to Save will give you some ideas about how to get more for your money.

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Develop a flexible budget

We never know when markets will plunge or when we might have a huge health care cost. So even if you are living within your means now, consider developing a budget that has both discretionary and nondiscretionary expenses.  For example, your utility bill and taxes are nondiscretionary,but travel may be at least partially discretionary. This way, you have already developed a contingency plan on what you will cut.

Consider a part-time job

I’m a fan of easing into retirement slowly. It’s hard to go from a full workweek for decades to full retirement. A part-time job doing something you enjoy will not only bring some money in, it will also give you less time to spend money.

Invest your nest egg wisely

Investing is relatively simple. Keep diversification high and expenses low. Total stock index funds allow us to own virtually every publicly held company on the planet with annual fees of 0.07 percent or less. Then carve out some safe money to go to insured CDs or high credit quality bonds or bond funds. You can accomplish this as simply as using three funds.

  • A total U.S. stock index fund
  • A total international stock index fund
  • A total bond fund
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But you must also have the discipline to stay the course. So many people panic and sell when stocks tank. It’s much better to develop an allocation you will stick with.

Delay taking Social Security

Finally, the best way to mitigate the first four risks is to delay taking Social Security. Clearly, this has some policy risk if Social Security payments are cut. While this risk is real, most experts think it will have a much lower impact on people who are already at retirement age. Raising the retirement age or maximum earnings subject to Social Security are more likely actions. The higher payment is also inflation-adjusted and is the single best way to mitigate longevity risk as it pays for the rest of your life and has a survivor benefit if you have a spouse.

Another option I’m far less likely to recommend is buying an annuity. In a simple annuity, you give the insurance company some money and they give you a fixed monthly payment for the rest of your life. While this definitely mitigates longevity risk, it exposes you to decades of inflation.

Wrapping it up

Money gives us choices in life. Though it may not buy happiness, it does allow you to pursue activities that you and your family enjoy and which add meaning to your life.

All of these financial risks are real, but be wary of those that confidently predict the future. Accept the fact that no one can. Taking some of these steps will increase the odds that your financial future is more secure.

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