Great news: You’ve got a whole lot of living to do. Americans in their 40s and 50s can now expect to live well into their mid-80s, according to the
What are the most common risks to your retirement strategy?
Once you retire, your financial risks can increase when one or more of these events occurs.
Outliving your savings.
Did you know that two out of three working men and half of women aged 50 and older are
Market volatility shrinks your portfolio.
New retirees in the year after or following the Great Recession of 2008 faced an especially steep stock
Inflation rises higher than your investment returns.
As the Consumer Price Index (CPI)
A short- or long-term illness drains your assets.
A healthy 65-year-old husband and wife retiring now and living into their late 80s2 may need
Tax code changes reduce your net retirement income and impact your legacy.
What was once a gift to your heirs may become a tax burden. For example, until the SECURE Act was enacted, IRA beneficiaries could take distributions (and pay taxes on them) throughout their life expectancy. Now they must do it in 10 years. Additionally, with the passing of the
You can address each of these rules with a solid plan to help keep your retirement vision on track. While there’s no such thing as a risk-free investment strategy, you can build a plan that helps you mitigate common investment perils.
Ways to help minimize the most common retirement portfolio risks
1. Adjust and expand upon your guaranteed income sources as needed.
Social Security and a pension, if you have one, are likely just part of your total retirement strategy. (Pension rules vary according to your employer’s criteria.) Nonetheless, you can take the reins by reviewing your Social Security status and looking into other types of guaranteed income to help prevent outliving your money.
Review your potential Social Security benefits.
Identify your target retirement age
Many pre-retirees have no idea just how much their benefit check can differ based on their retirement age. If, for example, you chose to retire at 62 instead of 70, you could end up with as much as 30% less if you opt for the earlier date, according to the
How much will a job cost you?
Here are two examples:
- Those working and younger than the full retirement age (FRA) are currently limited to $21,240 in income. If income exceeds $21,240 then for every $2 of additional income, above this amount the SSA will deduct $1 from your monthly benefit.
- If you are at full retirement age and make more than $56,520, the SSA deducts $1 for every $3 you earn above the limit.
Explore the pros and cons of annuities.
Fixed annuities can offer a high degree of predictability.
Variable annuities provide investment options.
This type of investment contract can offer greater flexibility in several areas. Depending on the contract, you can choose:
- The contract’s investments.
- How and when you’ll receive payouts.
- Lifetime benefits.
Critics cite the potential costs of these and other riders when recommending against a variable annuity contract. Still, depending on the contract and your feature choices, a variable annuity can offer
2. Diversify your portfolio with short- and long-term investments.
When you create a portfolio of growth-focused assets to complement your guaranteed income, you’re potentially filling the gap between your guaranteed income and the amount of income you need to live out your retirement vision.
You can opt to balance your growth-income investments between these two categories:
Dedicate a conservative bucket of assets for near-term living expenses.
To help preserve your retirement-plan principal, consider putting three to seven years of income into your bucket of conservative, growth-focused investments to be used for a few years of living expenses should the market experience a downturn. Index funds that invest in stable public and private bonds and blue-chip stocks, such as the Standard & Poor’s 500, can reduce your risk while providing relatively consistent returns. For example, the S&P 500 maintained a
To address the inflation risk, choose investments that can provide growth for your later years.
These mid- to higher-risk investments can provide the potential for growth and late-retirement income based upon your
It’s true that the value of these investments may rise and fall significantly. In particular, making a private investment in a startup is, in many ways, more of a loan with the hope of returns on top of its repayment, depending on the terms of the agreement. Your investment could end up being a complete loss if the firm doesn’t meet its income projections or fails entirely. However, this is part of a tradeoff: You’re giving up the security of lower-risk investing in part of your plan in exchange for potentially greater growth over a longer period of time. While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.
3. Bucket your investments with future tax laws in mind.
There’s good reason to plan for the possibility of high taxes. Here’s why: Right now, many Americans are benefiting from some of the lowest marginal tax brackets since the government instituted the federal income tax in 1913, with the lowest bracket at 10%. At the same time, the
What’s the wet-blanket part of lower taxes? They’re typically connected with a higher federal deficit. And a way to mitigate government debt is … raising taxes. With the low tax brackets of The Tax Cuts and Jobs Act of 2017 set to
Lowering your taxes can be easier if you can bucket your assets among three categories:
'Tax now' assets.
These investments incur taxes during the year you earn them.
'Tax later' investments.
The IRS lets you make pre-tax contributions to qualified-tax accounts. However, when you start taking distributions from these accounts, the IRS will tax both your principal and your earnings—that’s the bargain you’ve made for the sake of pre-tax investment.
If the tax rate rises during your retirement, your retirement income plan can take a serious hit. That’s why you shouldn’t be keeping all of your retirement investments in this category.
'Tax never' holdings.
Owners of these investments have funded them with after-tax dollars, and the IRS won’t tax distributions from them.
To the degree that you can do it comfortably, a tax-never strategy will do much to relieve your tax bite in retirement.
Learn more about working
4. Guard against life's 'what ifs.'
Sometimes the worst-case scenario happens. You or your spouse may suffer from a serious accident or illness, your pension fund may default or one of you may pass away, leaving the other in a less secure financial situation.
Consider and plan for worst-case health care consequences.
Without a plan, the onset of a short- or long-term illness could wipe out your investments. “Gap insurance,” which covers health care costs that Medicare does not, health care savings accounts (HSAs) and long-term medical coverage are ways to prepare for the unexpected.
Manage the 'survivor gap.'
You’ll want to work through the scenarios of either you or your spouse surviving the other. If you passed away before your spouse, could they maintain adequate healthcare, live in your current home, support your church and charities, and manage monthly expenses? The answers to these great questions will come from assessing:
Social Security benefits. Whether the spouse with the higher or lower benefit passes away, have you calculated the net loss of household income?
- Tax filing implications. If you filed jointly, that would change, and so would the surviving spouse’s tax burden.
- Your life insurance contracts. Does your coverage reflect your current expenses and lifestyle?
Work with a financial advisor on ways to help ensure that either you or your spouse won’t need to worry about their financial well-being during an already stressful time.
Review the potential tax consequences of your wealth transfer plan.
Some recent tax code changes can have a negative impact on passing wealth to your heirs. For example, when you name a beneficiary on an IRA or other qualified tax account, the previous provisions let that person make distributions throughout their life expectancy. However, the SECURE Act, part of the U.S. tax code, now requires
You can lessen the potential bite of
Talk with your financial advisor and tax advisor about building a legacy plan that helps shield both you and your heirs from unfavorable tax consequences. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.
How to get started on a risk-minimizing plan.
Remember that concerning list we started out with? Hopefully, you can now see that while financial risks in retirement are real, you can plan to lessen their impact. Work with a financial professional in cooperation with your accountant and attorney to see how you can overcome the challenges we’ve discussed here. You can also use the
A solid plan can provide for your retirement years as you’ve envisioned them, leave your family with a legacy and support the causes that matter most to you. When you plan for key retirement risks, you’re protecting the retirement vision you’ve worked hard to create. To learn more about preparing for the risk in retirement, connect with a