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 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.