Most people save, hoping the money they have at retirement will simply be enough. Though that plan is simple enough, it’s not really a strategy. As you enter the retirement phase of your life, its important to know the possible risks that you may face. Here’s my list of four retirement risks.
First, there’s longevity risk. Many people ask, if they can retire today with very little savings to their name. The only correct answer is “of course”, if you die next week; because your money only needs to last as long as you do. Unfortunately, that’s not a good game plan. People are typically living longer because of better diets, better medicine and better life styles; but a prolonged life, requires prolonged money, as well. You don’t want to run out of money before running out of life.
The second risk is market risk. This is where diversification is key. Having ten certificates of deposit at ten banks isn’t diversification, neither is having ten mutual funds at ten different mutual fund companies. It’s a balancing act where you’re the actor trying to play your part well into old age. This requires a diversification of assets to help provide income for the beginning of your retirement and growth for down the road before your final curtain call.
The third risk is inflation risk. This is hard to calculate because it’s a moving target. I’m old enough to remember double-digit inflation. Younger folks have learned from their experience that inflation seems to hang around lower single digits. Where will inflation fall for you? I’ve learned through the years that the cost of many products tends to hold somewhat steady over time. Services, on the other hand, tend to go up. As we age, we often buy less ‘stuff’ or products, yet we purchase more ‘services’. So, what we use our money for, can greatly affect our inflation risk.
Lastly, is our spending risk. During our working years, many of us try to earn, spend and save. In retirement our earned income has usually come to an end, as it is with our savings, as well. Now we enter the spending mode. What we buy, how much we buy and how often we buy can have a great impact on the rest of our lives, whether it’s automobiles, trips or unplanned medical care. If we haven’t budgeted before; it’s important to be budgeting now; otherwise we might be forced to earn once again and save once again.