Retirement can be one of the riskiest phases of your life. It’s not all sleeping in, trips and relaxation. Most people focus on their expected income, whether it’s taken in the form of Social Security, a pension, retirement plan withdrawals or savings; but, it’s much, much more than that.
The first of four major risks is actually life itself or should I say – living too long. Longevity risk has become more significant than in the past. People are simply living longer, while at the same time, we’re seeing a decline in pensions, which in the past guaranteed an income for life.
Number two is market risk. Instead of having a fixed income through a pension, retirees are often required to continue managing their own retirement assets until the end of their lives to help assure that they don’t run out of money, before they run out of life. If the market were to drop ten percentage points or more, life simply continues on, but with ten percent less money.
The third risk is inflation. Inflation does not stop on your last day of employment. In fact, some believe retirees may experience more inflation than those who are working. In retirement, you can expect to pay more for the services you buy. You could very well find yourself buying less ‘stuff’, but more services, whether it be mowing the lawn, shoveling the snow or paying condo dues for the things you no longer wish to do or no longer can do.
Lastly, you may face a spending risk. You’ve waited years to be free from work and free to do as you please. Does that mean sitting in front of the television and watching the world go by? Probably not. A retired friend of mine seldom knows what day of the week it is, because as he says ‘every day is a Saturday’. During your working life, what day of the week did you spend the most money? It was probably Saturday. Now, every day is a Saturday with more traveling trips and more free time activities; and guess what, much of that time spent, is spent spending money.
Longevity, market fluctuations, inflation and spending are all a part of the thinking you should do regarding your retirement planning, before you consider taking your very last paycheck.
