As you approach retirement, you’re playing a game of risk and reward with your savings and investments. A solid retirement plan will take into account eight risks as you approach retirement:
- Market volatility
- Taxes
- Inflation
- Political changes
- Demographics
- Health
- Family obligations
- Lifestyle and spending
These risks could have lasting impacts on your retirement if you don’t consider them now, and take steps to protect yourself.
We’ll discuss the first four risks today, and cover the others next month.
Market volatility
Historically, the stock market has steadily increased in value over time, despite recessions and dips. That’s why stocks are a good bet in the long term.
However, it’s entirely possible that the market will take an unfortunate dive right before you plan to retire. Additionally, your individual investments might not fare as well as the market as a whole.
How do you ensure that your investments will withstand that potential volatility?
Tax risk
It’s important to consider how heavily you might be taxed when you withdraw from your investments during retirement.
While tax laws are subject to change, some general tax principles should be factored into your plan. For example, you should take advantage of your future bracket versus the tax rate you would pay today.
A good financial advisor will guide you through those considerations, depending on your circumstances.
Inflation
You can’t put your savings under a mattress and expect the stack of cash to have the same value when you retire 10, 20 or 30 years from now. Even low-risk investments must account for inflation of at least 3%.
The greater risk is the potential for inflation to increase dramatically in a poor economy. Your investments should be protected against these major swings in inflation as well.
Political changes
Maybe this wasn’t as big of a risk 20 or 30 years ago. However, we’ve recently seen how dramatically policies can change from administration to the next.
Major policy changes could affect how your investments are taxed, how you are able to invest, and ultimately when you can retire.
How to protect yourself
Since all of these risks are difficult to predict, it can be challenging to know how to navigate them. However, there are some protections that can mitigate your long-term risk.
A good financial plan will use three primary mechanisms:
ROTH IRAs
With a ROTH IRA, you can remove your funds tax-free, which decreases the risks based on taxes and political changes.
Life insurance
Many folks don’t think of insurance as part of your retirement plan, but this is key. If the primary breadwinner of the house can’t work or dies suddenly, families who are unprotected often draw down their retirement savings in the aftermath.
Draining your future retirement is a terrible way to survive the present. Protect your family now with life insurance, and make sure it has living benefits!
Fixed income annuities
With a fixed income annuity, you have a guaranteed interest rate during your accumulation period. Of course, you won’t make as much as you if you invested directly into the stock market.
However, to ensure your future financial security, you need to diversify your investments to reduce your risk.
By investing your money in different ways, you ensure that if there are fluctuations in one of your assets or investments, you have savings that are unaffected by these risks.
Create an individualized plan
Realistically, the only way to make sure you have considered all these risks for your financial situation is to talk to a financial advisor.
Let’s make a plan together so you can have peace of mind as you approach retirement. Schedule an appointment today!
