It's a tough job to prepare for your retirement, but someone has to do it, and that someone will have to be you. Saving enough money to live comfortably once you've retired from full-time work seems like a daunting task, and even when you feel like you have control over the situation, factors can arise that put your plan at risk. What steps can you take to minimize the risks facing your retirement portfolio?
Mitigate the Effect of Sequence Risks
While you can always control the amount of money you are willing and able to save during the course of your working career, you cannot control something known as sequence risk, or sequence-of-return risk. Boiled down to a simple concept, sequence risk involves the specific time periods during which you invest, rather than the amount of time.
For example, an individual investing over a particularly strong period of 30 years in the market could potentially save 27 times their salary. Conversely, another individual saving the exact same amount of money and exhibiting the exact same spending/saving behaviors might only save 3 times their salary during a less stellar 30-year period.
Set aside the appropriate amount of money as you approach retirement to help offset years of negative portfolio returns, and you'll find retirement a little more comfortable.
Monitor Withdrawal Rate Risk
You should be keeping a close eye on your accounts during retirement as you begin to withdraw money from them. It can be tempting early on when you see a large nest egg to assume you can continue to live a lavish lifestyle. Track your withdrawal rate by dividing your total portfolio withdrawals into your account balance each year. If you're withdrawal rate is greater than 5%, it's time to stop and reevaluate. Keep in mind that different age groups and investment styles might be able to sustain this, but it's not generally advisable.
Offset Inflation Risks
Inflation can erode your purchasing power and overall financial well-being during retirement, even when the inflation rate is low. Certain programs, such as Social Security, automatically increase payments to account for inflation. You can extend the life and power of your Social Security payouts by delaying the start of your benefits. This increases the amount of monthly benefits payments, while also helping to avoid this next risk to your personal accounts.
Protect Against Longevity Risk
The greatest fear many have is outliving their retirement funds. This is known as longevity risk. The flow of money from your investment portfolios during retirement is extremely sensitive to market fluctuations, because money is no longer coming in, and continues to flow out into your pocket, but also shrinks with market downturns. Your Social Security benefits are a great place to start mitigating your longevity risk. You may want to consider relying more heavily on those benefits, and try to draw less from your personal portfolios during this period. An additional option would be to seek out longevity insurance.
Some insurance companies offer longevity insurance in the form of annuities that set aside a lump sum of money for you at age 60, and provide you guaranteed income at age 85 in return. NOTE: Guarantees are subject to the claims paying ability of the issuing insurance company.
If you have any questions to ensure that you are using your money wisely during retirement, and avoiding the potential risks contact Manhattan Ridge Advisors today.