There was a helpful post on The White Coat Investor blog recently titled, “What’s Your Biggest Financial Risk?” If you didn’t see it in our roundup a couple of Fridays ago, it’s worth reading.
It made me think of the greatest retirement risks, since retirement — or, perhaps better described as preparing for our later years — is the main financial objective most of us are pursuing with our investments. Some of those risks are among those included in Dr. Jim Dahle's post, but a few others come to mind as well. They include:
• Sequence of returns risk. Dahle touched on this one and linked to a related article, but it’s worth highlighting. It’s the risk of a bear market occurring on the cusp of your retirement, which could seriously hinder your portfolio’s ability to provide the amount of income you will need throughout your later years.
One of the most effective solutions for managing this risk is what’s known as “the bucket strategy.” The idea is to keep two to three years’ worth of essential living expenses in a money market fund or similar “cash” position. While that may create a drag on your overall portfolio’s returns, it will also help you avoid drawing from riskier investments that have declined in value.
SMI has written several articles on this topic, including A “Bucket Strategy” for Managing Cash Flow in Retirement, What’s in Your Buckets?, and When a “Bucket Strategy” Shines.
• Underspending risk. I talked with a financial advisor recently who described an especially conservative client I’ll call Bob. The advisor showed Bob that he could spend at least $25,000 more per year with extremely minimal risk of running out of money throughout his retirement. He could be giving more, helping adult children more, or simply enjoying more of what money can buy. However, Bob has what is a very common concern among retirees: running out of money before he runs out of time.
There are no easy solutions to this one, especially since it is as much a behavioral (emotional) issue as a financial issue. As a starting point, simply being aware of this as a potential "problem" will help. Thinking of it that way may be new for some people since, as I said, many retirees are much more concerned about the possibility of running out of money. Still, consider whether you really want to leave a sizable estate behind. Would you rather have used some of that money in other ways?
More practically, running updated estimates with MoneyGuide each year can help. As can arranging your finances so that your essential expenses are covered by guaranteed sources, such as Social Security, a traditional pension, and possibly an annuity purchased with a portion (but not all) of your portfolio. That may provide a greater sense of freedom to give or spend more of your discretionary funds.
• Marriage risk. There’s an old joke among newly retired couples: “I married you for better or for worse, but not for lunch — at least not every day!” The romantic in us would like to think that having more time to be together will be a good thing. Realistically, though, for many couples, a change of routine — from being apart during the work day to being together every day — can take some adjustments.
In fact, the rate of so-called “gray divorce” — divorce after age 50 — has doubled since 1990. For those age 65 and older, the rate has tripled. In part, some researchers blame the empty nest syndrome. After focusing on the kids for so long, once they’re out on their own, some couples find they don’t have much in common anymore.
As with most things related to later life, it helps to give this potential risk some thought in advance. If date nights are not a regular occurrence in your household, before retirement would be a good time to start. If the only vacations you’ve taken over the years have included your kids, perhaps it’s time to schedule a trip for just the two of you.
How are you preparing for these later life risks, and what others do you foresee?
