Within the last month, we have had two meetings with new clients each of which are planning for retirement. Like many of our clients, neither of the two knew when retirement would begin. At our first meeting, as we discussed risks – specifically investment risks – one of the clients asked “So, how much risk do we need to take in retirement?” While we always complete their planning before providing a specific answer, the general response given to our new clients who ask the question is that you should only take as much risk needed to accomplish your short- and long-term goals. Usually their response guides us into a discussion about what those goals are which will serve as the framework of a customized ongoing plan.
The zinger really came in the second meeting when our client asked “So, what are the risks you see for us in retirement?” This time I didn’t answer in order to gather my thoughts. After some time to think, I have concluded that there are many, but four seem to be more prominent than others. They are:
Longevity Risk – Most people imagine their life in retirement at least as good as in their working years, including being economically as well off. With Social Security and pension income, we know that clients can maintain a fixed source of income, but their lifestyle could suffer greatly if the steady capital inflow from their investments is eroded over time. In our initial planning process, we project lifespans out between 20 – 30 years and much will happen during that time! The risk is that with ever better nutrition and medical care, retirement lifespans could last well beyond those projections and beyond that investment income.
Healthcare Costs – As a parallel to longevity risk, healthcare costs will continue to rise as we breeze through retirement. Even if we don’t consider the high rate of healthcare inflation, it is estimated that most retirees will spend between $250,000 and $300,000 on health related expenses, including the cost of long-term care (or the insurance to offset that care).
Investment Risk – Many of the gurus in our profession are preaching of a future with lower returns than have been the average since 1982. Even though we have had a bull market over the last five years, it has certainly been a reluctant bull. And after last year’s gains, it appears the market has stolen returns from future years. With stocks a little on the high side and bonds being very expensive, it is hard to see what will drive returns to their long term averages of 8 -9% over the next 20 years. Add to that the conundrum of the massive number of baby boomers retiring and the outlook becomes pretty murky, at least based on our historical perspective.
Finally, as I said in the beginning, there are many financial risks for retirees to ponder. However, the sneaky one, the one few consider is the risk of not enjoying retirement to its fullest because you are worried about all the other risks. A good spending plan, appropriate investing, and ongoing monitoring will go a long way towards mitigating all of these risks.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.