As a financial adviser, I have discovered that most people understand retirement as a point in time and as a time where employment either ends or changes.
In reality, retirement is the beginning of the next chapter in one’s life. My experience is that many people approaching retirement are underprepared for this event.
Consider the following risks and their impact on the quality of life in retirement:
• Market risk.
Far and away, money in a qualified plan such as a 401(k) or an IRA can be subject to erosion due to a down market. Consider the impact of the market on retirement dollars in 2008. By definition, investments have some exposure to market fluctuations.
• Longevity risk.
According to a recent government study, at least one person in a marriage has a significant chance of living into his or her 90s. The impact that a down market could have on a couple living well into their 80s requires careful planning to promote the growth of assets to at least keep up with inflation and, at the same time, work to protect the capital from loss. Retirement income has to last at least as long as the retiree.
• Health risk.
While coverage for all Americans is laudable, the affordability individually (and as a nation) seems to be an ever-increasing cost factor. Fidelity Investments (Investment News, August 2012 issue) recently projected that a
65-year-old couple would pay $240,000 in medical cost during retirement.
This includes Medicare costs, but does not include long-term care or home health-care costs, over-the-counter costs or dental costs
There is the possibility of needing home health care, assisted living care or nursing home care. These costs could severely deplete a retirement account as early as in one year.
• Liquidity risk.
The retirement plan must be flexible enough to allow access to cash when needed. Therefore, a distribution plan has to be able to provide money even when unanticipated.
n Inflation risk.
No matter the percentage, inflation is corrosive. When combined with longevity, inflation can seriously de-value the buying power of a dollar. Health, housing and Medicare costs all impact inflation.
• Legacy risk.
The three main goals of most retirees are not to outlive one’s financial resources, be able to help children in need and leave a legacy.
There are many ways to minimize or eliminate these risks, but the most economically and wisest way is to work with a trusted financial adviser who will help you develop an income allocation plan (as opposed to an accumulation plan).
There is no single product to manage all six risks, so a sound plan is one that seeks to diversify enough to address the risk.
Don C. Hall is president of Centennial Financial Group of Johnstown. Centennial Financial group is not a subsidiary nor controlled by ING Financial Partners Inc.