Are you thinking about or close to retirement? Or are you starting out in your career, and know you need to put money aside for the future, but don’t know where to begin? Well, we’re launching a new series of articles by our expert financial advisor Chris Fehr of Freedom Financial Wealth Management that will help you navigate the path to your retirement and financial goals.
In his first article for Eighteen21, Chris, who has been in the industry for 24 years as both a CPA and investment advisor, talks about five key risks that can derail retirement.
The number one fear in retirement is outliving your money. Since no one knows exactly how long he or she will live, planning is difficult without the right tools and knowledge. Did you know that if you are 65 now there is a 50% chance you or your spouse will live until 93 and a 25% chance one of you will live until 98? The longer you live, the longer you are exposed to other retirement risks.
Inflation is the silent thief. Over time, the costs of goods and services increases while most retirees live on relatively fixed incomes. This decreases purchasing power over time. For example, if inflation remains at 4%, in 10 years time something that costs you $1,000 today will cost $1,480 in 2027, and in 20 years time $2,191. In addition, the inflation increase to Social Security is usually much less than the actual inflation people experience in their lives.
While inflation has been relatively low in recent years, healthcare costs have rocketed at an annual rate of over 6.5% from 2000 to 2014. Since, Medicare Part B premiums, as well has Medicare Supplement policies, have seen dramatic increases. Our grandparents tended to get sick and pass away. With modern medicine, we get sick and stay sick. This can derail even the best-funded retirement plan.
This risk is composed of three parts: 1) withdrawing in a down market, 2) excessive withdrawals, and 3) sequence of returns. If your retirement plan is not structured properly, you may have to withdraw money during a down market. This dramatically increases the possibility of running out of money, which leads to excessive withdrawals. Because we live longer, interest rates are low, and volatility is high, experts now say you cannot withdraw more than 3% of your assets per year without the risk of running out. This is why sequence of returns is so important. Losses in the five-to-10 years before and after retirement can derail even the best plan. Make sure your financial advisor stress tests your portfolio for all market conditions so you are allocated properly.
Lastly, market risk includes both volatility and the mix of your investments. Looking at average rates of return can fool people into thinking they are safe "for the long run." Unfortunately, reality doesn't mirror averages. There are high highs and low lows. If your investment risk isn't properly structured, chances are high that market risk will have an outsized impact on your retirement.
So, if you want to leave a legacy, beat inflation, guarantee income, minimize risk, maximize returns and minimize taxes you need to create an income floor that is not subject to the above risks.
Investment advisory services are offered through Freedom Financial Wealth Management LLC, a Registered Investment Advisor in the State of Illinois. Insurance and Tax products and services are offered through Freedom Financial Group, LLC. Freedom Financial Wealth Management LLC and Freedom Financial Group, LLC are affiliated companies.