Life is fraught with danger; everybody knows this. When we take a closer look at one particular slice of life, retirement, we begin to see more clearly what those risks are. This recognition allows us to begin hedging against risks as best we can, through prudent planning.
Before we get started, we must first agree on the desired outcome of this game we’ll call, “A successful financial retirement.” Note the emphasis on ‘financial.’ In short, our goal is to live a full life, at our chosen lifestyle, without running out of money before death. Financially, that’s a great outcome. It doesn’t mean we’ve lived a successful life though, just a financially successful life by way of not running out of money before death. With that said, let’s look at the list.
27 Retirement Risks
• Longevity risk (living a very long life)
• Excess withdrawal risk (also called portfolio failure risk)
• Inflation risk (also called purchasing power risk)
• Timing risk (also called point-in-time risk)
• Long-term care risk
• Frailty risk
• Heath care expense risk
• Investment risk
• Asset allocation risk
• Market risk
• Sequence of returns risk
• Reinvestment risk
• Liquidity risk
• Legacy risk
• Forced retirement risk
• Reemployment risk
• Public policy change risk
• Loss-of-spouse risk
• Unexpected financial responsibility risk
• Financial elder abuse risk
• Unrealistic expectation risk
• High debt service risk
• Procrastination risk
• Overinvestment in employer stock risk
• Rollover risk
• Retirement-saving opportunity risk
• Inadequate resource risk
So how does this list strike you? Does it help you to consider what you’re up against when planning out your financial retirement? Admittedly, it’s more fun to do as the ostrich and bury one’s head.
So, which of these risks is the most damaging to your financial success? I’d make a strong argument for the first on the list: ‘Longevity risk.’ Why? Longevity is the risk multiplier. For example, a sustained poor stock market may not hurt a retiree as badly if they only have 6 months to live, but a person who lives well into their 90’s may find themselves depleting their assets much too soon if they draw too much money out of those market-based investments during the downturn. Similarly, a long-term care stay is made much more painful, financially, when the care recipient and their surviving spouse live much longer.
In its purest form, retirement planning is the process of ensuring that a retiree does not run out of money. It is only natural then, that the longer a life, the longer the money needs to last. I will sometimes joke that retirement planning would be much simpler if you could tell me how long you and your spouse are going to live. The process would be much, much easier. Since that’s rarely the case, not planning for your longevity means we’re not doing good retirement planning.
As a result of longevity’s power over all other risks, the foundation of a retiree’s planning must begin with a commitment to securing adequate predictable income first, as the very foundation of the entire plan. To skip ahead to the sexier aspects, like aggressive, potentially high-payoff investments (also potentially high-risk), may be putting cart before horse.
I hope it’s no secret that I wish all of our clients to have long and happy lives. I also hope it’s no secret that a strong foundation of certain income is our first and highest-priority planning discussion. We’ll embrace your longevity if you will. We’ll plan for your longevity so you can make each day count without fear of running out of money to cause you to count the days instead.
All the best,
Adam Cufr, RICP®