Retiring means you'll be embarking on a brand-new phase of life. To enjoy it to the fullest, you need to know that you've saved enough, the income sources you'll rely on, and that you've taken steps to manage any retirement risks to your savings.
Risks will vary from one person to another depending on circumstances, but many retirees share some common risks. Think about how each of these may affect you and how you can address them with your own retirement risk management plan.
In this article, we'll cover:
1. Longevity risk: Will your retirement savings last?
None of us knows exactly how long we will live. This makes spending in retirement a little tricky because we want to enjoy our savings, but we have to be careful not to spend it too quickly and risk running out. This is called
Retirement may last longer than you expect. According to
Given the uncertainty surrounding life expectancy, it's smart to consider ways to protect yourself from the risk of
Enter retirement with enough savings
Although you can't simplify your retirement down to a single number, you can estimate your savings need. It's helpful to have a rough target so you'll know if you're on track. A
Starting with enough money can reduce strain and alleviate pressure on your savings.
Maximize your guaranteed income sources
Incorporating income streams that are guaranteed to last you for life is like buying longevity insurance, and it can be effective at reducing retirement risks. Several options are available:
- Social Security. Social Security provides you with a monthly payment backed by the U.S. government. It pays for life and never runs out. Social Security also has a built-in
cost of living adjustment, so you won't lose purchasing power. Because of those features, it may be the most valuable source of retirement income you'll receive, so it's important to plan the time you claim your Social Security benefitcarefully.
- Pensions. Although they aren't as common as they once were, you still may be covered by a
defined benefit planor pension. If so, you probably have several options for how to receive your payout. This may include a lump-sum option or lifetime payments.
- Annuities. You can choose from many types of
annuities, each serving a different purpose. The primary purpose of annuities is to provide an income stream in retirement that is guaranteed for life. If you don't have a pension and your Social Security benefit doesn't provide enough guaranteed income, an annuity is one way to close the gap.
Have a mindful withdrawal plan
While it's vital to know how much money you have, it's also important to know how you plan to withdraw it. Your distribution strategy plays a key role in how long your money lasts.
2. Market risk: Preparing for market volatility
While you are saving for retirement, the long-term average return of your investments matters more than the year-to-year fluctuations. However, that changes once you begin withdrawing from your savings. Long-term return is still important, but
Reassess risk tolerance as retirement approaches
Your risk tolerance is about your emotional response to investment risk. When you are young, you likely have a higher
As you get closer to retirement and your tolerance for risk drops, you can reduce your exposure to volatility by shifting your portfolio to a more conservative asset allocation.
Consider spreading risk with diversification
Make sure to use different asset buckets
You also can reduce the effect of volatility by segmenting your portfolio into different buckets. Guaranteed income sources form the foundation of your income plan, so making the most of Social Security, pensions and income annuities can provide a cushion against volatile markets.
You can separate the rest of your investments into time-based buckets:
- Near-term. Hold enough cash and other short-term investments for immediate, near-term expenses.
- Long-term. Growth investments like stocks help ensure your money grows enough to cover expenses that are still five or more years away.
Segmenting your assets reduces the need to sell investments to raise cash during a market downturn.
3. Inflation risk: Factoring in inflation's impact on your retirement savings
It doesn't have to be exceptionally high to have an effect. For example, 3% annual inflation reduces the purchasing power of $100 to $73.74 after just 10 years.
The key to combating
4. Taxes: Preparing for tax implications to your savings
Tax planning in retirement is not simply about getting your tax bill as low as you can each year. It's about
Maintain different buckets for tax now, tax later, tax never
"Tax now", "tax later" and "tax never" buckets all may have a role in your retirement. If your savings is spread among all three, you can more effectively plan your distributions to be tax-efficient, pulling from each to strategically time your tax liabilities. You may withdraw from your tax-deferred accounts or do
Anticipate tax bracket shifts before & after retirement
Your tax rate may change over time for two primary reasons: changes to your income or changes in tax laws.
- Your income may go up or down depending on how much you have saved, your lifestyle goals and distribution plan. If your taxable income goes up, so will your tax bill. It may make sense to spread taxable income over many years to stay in the lowest marginal bracket possible.
- Tax laws themselves may change. Although you can't predict every move, some changes are built in. For example, the Tax Cuts and Jobs Act, expiring at the end of 2025, will cause tax brackets to revert back to pre-2017 levels.
Because you can control some portions of your taxable income in retirement, consider timing taxable distributions to take advantage of the lowest brackets available to you based on your estimations.
Include tax-efficient investments in your portfolio
Including more tax-efficient investments in your portfolio can help lower your liability. For example:
Exchange-traded funds (ETFs). ETFs are similar to mutual funds but have a more tax-friendly structure that reduces the amount of distributed taxable gains. Municipal bonds. These pay interest that isn't included on your federal income tax return and may not be included on your state income tax return either.
Manage accounts that have required minimum distributions
In most cases, you'll be subject to
Understand how Social Security benefits can be tax-efficient
In addition to providing secure and inflation-adjusted retirement income, Social Security benefits also receive
Depending on your combined income, your Social Security benefits may be tax-free. At most, only 85% of your Social Security benefit is taxable.
5. Health care costs: How to plan for health care costs
It's no secret that for most people, their health care needs and the associated costs increase with age. However, it's also becoming even more expensive with time. The U.S. Department of Health and Human Services reports
Consider the following tips to prepare for health care costs:
Secure long-term care coverage ahead of time
About 70% of people over 65 will
You may be able to dedicate a portion of your savings to cover extended caregiving, but
Know what Medicare covers
The vast majority of retirees are covered by Medicare. However, it's important to understand what Medicare does and doesn't cover and the out-of-pocket costs you may be responsible for. Based on your needs and Medicare's coverage gaps, you may want to consider a Medicare supplement.
6. The loss of a spouse: How to make provisions for a surviving spouse
Consider survivorship life insurance
While you may already share your lifetime finances and savings, another common way to ensure your spouse has enough when you're gone is with life insurance. The two of you can even be covered under the same
Social Security spousal strategies
Get help preparing for the risks to your retirement savings
Protecting yourself from retirement risks can help you feel more confident that your life won't be upended if problems out of your control arise. Planning your long-term financial strategy lets you mitigate the potential harm these risks pose.
It can be exhausting and unnecessary to plan for every possibility, and what each person needs to feel prepared for the future is different. For help identifying your unique risk factors and creating a strategy to reduce their potential impact, meet with a