When you enter into your retirement, the assets you have saved for so many years will now be one of your main sources of income. Do you know how much of your savings you can spend each year without outliving those funds? Today, versus 25 years ago, people are living much longer lives and are facing the reality that what they have saved for retirement may not be enough.
You should have a plan in place to help avoid the key risks to your retirement income, which are:
Overspending
The amount you spend can have a huge affect on whether or not your retirement income will last for your lifetime. Some people find that in retirement, they will spend an annual average of 80% of their pre-retirement income. Some, however, will spend more than 80% or even 100%. Withdrawing at even a slightly higher rate can reduce years of your retirement income.
Example: $1 million portfolio, annual withdraw amount of 4% rather than 5% would provide six more years of retirement income.
Not planning for a long retirement
With lifespan ever increasing, it is impossible to predict how long you are going to live and you may spend more years in retirement than you did working. You should plan for a longer retirement period, to be on the safe side.
Market risk
Many retirees are very conservative in their retirement investment risks. CDs and bonds seem to be the investment vehicle of choice to avoid the volatility of the stock market.
These conservative approaches can reduce the opportunity for growth and may hinder the investment's ability to keep pace with inflation.
While CDs offer a fixed rate of return and do not fluctuate with the market, there is still a risk/reward to every investment. Taking on market risk, by investing in products such as mutual funds and equities has its risks, but they also have a non-fixed rate of return.
Inflation
Purchasing power can be eroded by the always-present inflation. With a current increase rate of 3%, your money today will not be worth the same amount in one, five, or even ten years.
Example: A retiree with $75,000 of living expenses today would find that they will need just over $150,000 25 years from now.
Cost of health care
It is estimated that while in retirement a couple can plan to spend $200,000 to cover their out-of-pocket medical costs, on prescriptions, deductibles, and premiums.
It would be beneficial for those who have just started their careers, those who have been working for 30 years, or even those nearing retirement to consult a financial advisor.
For more information, contact Luke Draxton at American Federal Bank by phone at 888-389-3377 or email him at ldraxten@americanfederal.net
American Federal can assist you with all your banking, insurance, and investment needs.
