Four Major Pitfalls of Investing in Retirement
Investing in retirement can be tricky, as it requires that you consider several factors of lesser concern to younger investors. Make a mistake and you could find yourself surviving on less income than you planned, paying more in taxes, or leaving a much smaller legacy to your heirs than you thought you would.
1. Planning for the right time horizon. Whether or not you realize it, longevity is the number one risk facing retirees. Your life expectancy if you are now 65 is at least 20 years, but that represents an average; many seniors live much longer.
In fact, a 65-year old male has a 25 percent chance of living past 92, a female has a 25 percent chance of living past 94.
Thus, that 20-year number is not very useful when it comes to individual planning.
2. Market Risks. Retirees still need to invest a portion of their nest egg for growth, yet cannot afford to take on the same level of risks as a younger person because there is less time to make up for bad decisions that have a negative impact on your portfolio.
3. Inflation. Most investors do not realize that your income must double every 20 years just to keep up with the average rate of inflation.
Many pensions do not include a cost of living adjustment, thus your personal savings will have to grow either adequately to cover inflation, or be large enough to allow you to draw an ever-increasing amount of income each year.
4. Starting retirement with too large a draw down. The amount of income you need to draw from your savings, just to maintain your lifestyle will increase with time.
Other costs such as medical expenses are also likely to rise, as you grow older.
Most retirees will need to start somewhere in the 3-6 percent range, then allow increases to that amount for inflation.
Figuring out what you should take will require analysis of your life expectancy, the number of guaranteed/lifetime income sources you have (such as pensions or annuities), and the composition of your portfolio.
In conclusion, when it comes to developing your financial plan for your retirement plans you need to pay close attention to details that were less important when you were younger.
Fortunately it is possible to structure most portfolios to protect yourself from running out of money.
Your best defense is to address your specific needs, concerns and desires, and ask for help from your financial professional to develop a plan and portfolio that will allow you to sleep comfortably in the knowledge that your life will remain financially secure.