Proper retirement planning is the only way to ensure your financial security and comfort after you hang up your boots, but you have to be smart about it. It isn’t just about putting money into an IRA or 401(k) every month. You also need to account for potential risks that could affect your savings or spending power too.
We’ll look at the 5 biggest risks to your retirement fund (as well as possible solutions) below:
1.Financial Risk – Inflation and low interest rates can eat into your retirement savings. The effects are more serious when you’re living on a fixed income, so consider working part-time to counter them.
Investing in stocks, stock funds, inflation-protected securities and annuities can help offset inflation. Certain pension programs and Social Security benefits also adjust your income for inflation while you’re working. Buy investments with real and long-term interest rates (higher than the cost of inflation).
2.Market Risk – Stock market fluctuations (sequence of returns) are another major worry for retirees, especially after the devastating impact of recent market crashes. Plan against this possibility early on!
Diversify your investments so the risk from potential stock market losses is spread out. Avoid putting all of your retirement savings in stocks, but consider investing in guaranteed investment contracts, global bonds and real estate investment trusts instead. Play with riskier investments only if you’re a long way from retirement.
3.Personal Risk – Unemployment, marriage/divorce, death of a spouse and other changes in your life or family’s needs can also lead to unexpected expenses, affecting your retirement security.
Plan for situations where you may need to offer financial support to a family member, split your assets after a divorce, receive lower pension/Social Security benefits if your spouse dies, etc. Invest in life insurance, healthcare plans and other financial vehicles that protect against these unfortunate possibilities.
4.Longevity Risk – Retirees are living longer than ever, and there’s a chance you may outlive your retirement savings completely. A longer lifespan also increases the chance of facing other risks!
The best solution is to save every dollar you can. Cutting down on expenses today can help you tomorrow, so balance this risk against your current and future needs. Don’t assume that what you’re saving now is enough, since a larger nest egg will also help you handle the impact of other retirement risks.
5.Business Risk – Your employer-provided pension plan may not be as secure as you think, since there’s no guarantee against their bankruptcy or the insurer’s solvency. Invest in your own 401(k) or IRA too.
With defined-contribution plans, balances are not affected by business risk unless they’re concentrated in employer stocks. If you’re relying purely on employer-sponsored plans, take potential losses of future contributions and market performance of investments into account while allocating assets.
At Self Directed Retirement Plans LLC, we can put you in total control of your retirement dollars and open up many investment asset classes most people never think about. Contact us to learn how!