Resource Risks Can Derail Your Retirement

Longevity

No one knows exactly how long they’ll live. Today, the average male and female will live to age 86.5 and 88.8 respectively. That means half the population will live even longer. Married couples increase the odds that one will reach age 93. This makes planning difficult due to the fact that the length of time a retiree needs retirement income is unknown. Some advisors now recommend planning for age 100. Keep in mind longevity is not only a retirement risk, but it’s a risk multiplier of all other retirement risks. There are mortality products that can take most of the longevity risk out of the equation.

Inflation

Inflation is the silent thief. Over time, the cost of goods and services increase while most retirees live on a relatively fixed monthly income. This can dramatically decrease purchasing power of your retirement dollars. An inflation rate of 3 percent may mean your income needs to double over a 24-year period just to keep pace with future domestic spending. There are “income-generating” products with a cost-of-living adjustment that can mitigate some of the inflation risk. Until six years ago, Social Security always paid an annual increase. Three of the last six years haven’t paid an increase at all. Could this be a sign of things to come?

Excess Withdrawal Risk

Withdrawing 4 percent of your portfolio is fine as long as the interest and dividend portfolio performance generates the rate of return to cover it. So, many advisors have reevaluated their income recommendation to 3 percent. But is $30,000 worth it if you must hold hostage a $1-million portfolio to generate such a small annual income? Most retirees can’t live on that. So they take out more than their portfolio generates, withdrawing too much, eroding their portfolio principal with a high probability of running out of money later in life. There are products that can generate $30,000 with an inflation provision that may only need $650,000, freeing up the other $350,000 for investment opportunities.

All three resource risks can derail your retirement, so be cautious to keep on track.