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Are You Getting Retirement Risk Wrong?

Stock market jitters top retirees’ list of financial concerns, but outliving your money is the bigger threat, study finds

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What’s the biggest risk to your retirement security? Chances are, it’s not what you think.

Recent research found that retirees rank stock market volatility as the largest threat to their finances. In reality, you’re most likely to face fiscal challenges in retirement due to living longer than anticipated and outlasting your money, according to a July 2022 study from the Center for Retirement Research at Boston College.

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The second biggest financial risk for retirees is health care costs, particularly for unexpected medical issues and long-term care, the center found. “Out-of-pocket expenses rise quickly with age, and health costs in retirement have increased substantially over the past few decades,” the report says.

Investment risk — the chances that a volatile market will reduce the value of our IRAs and 401(k)s and leave us high and dry — ranked third among real-world financial threats to retirees. Perceptions notwithstanding, market fluctuations pose less of a threat “thanks to retirees’ relatively long —about 20 years —investment horizon,” the study notes.

Market issues ‘top of mind’

“It is not surprising that stock market risk is overestimated, considering the news headlines in our life, especially what happened in the market during the past two years,” says Wenliang Hou, a quantitative analyst at Fidelity Investments and the study’s author.

“For a normal person who is not an expert in finance, it is very easy to follow the media and overstate the market volatility,” he says.

Behavioral economist Tom Chang agrees, noting that “things that are easy to access and talked about tend to dominate people’s thinking.”

“We call it ‘salience,’ ” says Chang, an associate professor of finance and business economics at the University of Southern California. “People tune in to the news or listen to TV, and then they hear about a market crash. Because it’s constantly in the news and what people talk about, it’s top of mind.”

At the same time, most of us don’t like to think about illness and death, and “if you don’t like to think about those things, you’re not going to spend time planning for them,” he adds. “As a way of pain avoidance, we tell ourselves, I’ll just figure it out later. But then it never really gets done.”

Chang says this type of emotion-driven decision-making (or non-decision-making) can impede not just financial planning for retirement but also making important medical and legal arrangements, such as writing wills and end-of-life directives.

4 ways to hedge against retirement risks

Rather than letting short-term market fluctuations dictate your long-term strategy, retirement pros advise focusing on things you can control. With that in mind, here are four money moves to consider if you’re looking for additional income streams and a measure of protection against outliving your money.

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1. Get universal life insurance with living benefits

“Longevity and health risk completely go out the window with a fixed index universal life policy,” says Rex Jackson, an accredited investment fiduciary and head of IE Invests in Redlands, California.

Distinct from traditional life insurance that pays out a cash benefit after death, these policies can contain an “accelerated benefit rider that gives you available capital to pay for any terminal, critical or chronic life event, completely tax free,” he explains.

Living benefits policies often cost more than standard life insurance (though some insurers offer an accelerated benefit rider for free), and it’s important to note that they do not cover long-term care. But they do offer a way for pre-retirees and retirees to access funds in times of need, “without having to destroy your 401(k) or touch other accumulated assets,” Jackson says.

2. Buy an annuity

Annuities are insurance contracts that require you to make premium payments in exchange for the insurer providing you with interest. There are numerous types, including fixed indexed annuities that track stock indexes such as the S&P 500 but that, unlike direct investments in stocks, guarantee there will be no loss of your principal.

By providing this downside protection and a predictable income stream for life, annuities offer a hedge against both market and longevity risks.

“The fixed indexed annuity also has health care benefits,” Jackson says. “If one is incapacitated — typically for 60 or 90 days — that annuity policy will now start paying out under the same three conditions [as life insurance with living benefits]: critical, terminal or chronic.”

To get the payout, you typically must have a note from your doctor attesting that you can no longer perform at least two activities of daily living, such as bathing, eating, getting dressed or getting in and out of bed.

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3. Invest in dividend-paying stocks

Another way to address longevity risk is to add a healthy number of dividend-paying stocks to your mix of investments.

“The great thing about dividend-paying stocks is that they can provide decent to steady income while also giving you growth and liquidity, and it’s rare to get all three of those benefits at the same time,” says Kevin L. Matthews II, a former financial adviser and founder of the investment education company Building Bread.

Dividend-paying stocks are mostly “older, boring companies that have been paying dividends for decades, if not 100 years,” Matthews says. They’re “not as volatile as some of the high-flying tech stocks we’ve seen.”

Having more of these stable investments in your portfolio can be a great way to increase your lifetime income — and, perhaps, ease jitters about short-term market swings.

Check out various lists of so-called “aristocrat stocks”: large, publicly traded companies such as Coca-Cola, Chevron and Procter & Gamble that have a long track record of paying shareholder dividends in good times and bad.

4. Become a landlord

Real estate is another way to generate income for life. Cash flow from a rental property can help you cover monthly bills or unexpected expenses. The longer you hold an investment property, the higher your returns, as rents generally increase over time.

When weighing a property purchase, estimate the cash flow you can expect. Take the monthly rental income from the unit and subtract all the associated monthly costs, such as:

  • Mortgage
  • Property taxes
  • Insurance
  • Homeowners association fees
  • Maintenance
  • A cash reserve in case of tenant vacancies
  • management fees (hiring a property manager means you don’t have to personally worry about headaches like leaky toilets or late-night calls from tenants)  

Most real estate investors look for an ROI, or return on investment, of 8 percent, according to Roofstock, an online real estate investment marketplace.

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