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January 31, 2019

Are You Prepared for These Common Retirement Risks?

As you plan for your retirement, you may feel a sense of excitement as you look forward to reaching this significant milestone. Or, you might be trying to figure out what direction you want your life to take after you retire, whether that involves starting an encore career, spending more time with friends and family, or volunteering for a cause that matters. 

As part of your planning, it just makes good sense to think about common retirement risks, including one that previous generations didn’t necessarily have to address: outliving your retirement savings. As Americans are living longer than ever, there is an ever-increasing risk of this event taking place. According to Merrill Lynch, 37 percent of people underestimate their “likely life span” by at least five years, which means they aren’t planning for the right target goal.

Additional common retirement risks include:

  • stock market volatility
  • inflation
  • tax issues
  • growing medical expenses

At the core, each of these risks is financial and, in many ways, the events themselves are out of your control. So, what can to do to mitigate the impact of these risks to enjoy your retirement to the fullest?

Here are four strategies to consider.

Delay Claiming Social Security

If you wait until you’re 70 years old, rather than 62, “your monthly income could go up 76% . . . Though you sacrifice income early on, knowing you’ll have higher Social Security payments if you reach your eighties and nineties is like having ‘longevity insurance.’”

So, consider if you can continue to work at your current place of employment – or mull over that encore career idea mentioned above.

Understand Tax Implications

NextAvenue.com suggests you think about the types of retirement savings in three different buckets:

  • Taxable money: These include liquid accounts that result in “earned dividends or recognized gains,” from savings accounts to checking accounts where you earn interest, along with stocks, and many types of bonds and mutual funds.
  • Tax-deferred money (tax-postponed money): This includes 401(k) plans and IRAs; because taxes typically go up, this is often a great choice to grow wealth.
  • Tax-free money: These include certain types of bonds and Roth IRAs.

Next Avenue recommends a diversified portfolio, tax-wise, among these three categories, with as much money as possible placed in the tax-free category.

Manage Your Portfolio Well

Nobody can predict what the stock market will do in the future, but SeekingAlpha.com suggests you honestly consider the following question to assess your own risk tolerance: “Do you care more for the wonderful gains that may lie in the future or are you more worried and restless to preserve your financial assets?”

This article goes into significant depth as it describes three different strategies to grow your wealth and mitigate financial-related retirement risks. The overall conclusion, though, states that, while it’s important to grow your funds as much as possible, it’s even more important to mitigate risk. When you don’t effectively manage your risk, it “can cause havoc with a portfolio,” especially as you approach the stage of withdrawing funds.

To help mitigate the risk of outliving your retirement savings, Investopedia.com suggests you explore purchasing an annuity; while there are clear benefits, there are also disadvantages to consider, “including loss of control of assets, loss of ability to leave money to heirs and cost.” You can find more information about annuities and retirement here.

Commit to a Healthy Lifestyle

The Investopedia article refers to advice given by the Society of Actuaries – and that’s to mitigate healthcare costs by eating right, exercising regularly and otherwise focusing on preventive care.

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