Risks in Retirement- A World of Opposites

It’s a whole new ballgame!  When people decide to retire and go from an accumulation to a distribution mindset everything is turned inside out / upside down.  It really is a world of Opposites!  When one is in the accumulation phase (Front 9) everything is pretty much laid out in front of you.  You have a specified timeline as it relates to planning, you know when you want to retire and work towards that date, when one retires you don’t know how many years you’ll be retired (are you dealing with 1 or 40 years) this is called Longevity Risk.   When things go wrong during the accumulation phase you can easily adjust your timeline or other goals, you may decide to work a couple of extra years or readjust your financial goals.  If you’re retired and decide to go back to work that is not easily accomplished especially if you been out of the work force for a year or so!

Other Risks that Must be Managed

Health Risks

There are 3 Stages of Retirement – Go Go Years, Slow Go Years and No Go Years, if you don’t believe look at  yourfamily and friends, I can assure you except the case of accidents we will all go thru the 3 phases if we live long enough.  Long Term Care (LTC) can absolutely devastate one’ retirement portfolio.  My mother who is 94 has been in a facility back in Wisconsin the last 3 ½ years, monthly costs for just room and board is $5,500/mo. or $66,000/yr.  The sad part is one spouse might enter a facility, stay several years and then pass away, but that stay might have devastated the finances for the surviving spouse.

Bear Markets / Low Interest Rates / Inflation Risks

We’ve been blessed with an extremely good stock market, although somewhat volatile over the past 20+ years, but what will happen when the next bear market makes it appearance?  Right now, I think the market is good, because of low interest rates, the Fed is printing money like there is no tomorrow and there is no where else to go!  But this market will correct and we will have a bear market and the question for retirees is how will that market correction affect their portfolio and withdrawal strategy?  As an aside, yesterday there was an article in Financial Advisor magazine which advocated that the 4% withdraw rate from a portfolio should be reduced to 3.3% due to low interest rates, thus a safe withdraw rate from a $1,000,000 portfolio would only be $33,000/yr. or $2,750/mo.

Black Swan Risks

Probably one of the least appreciated risks we all face is something called Black Swan risk (metaphor that describes an event that comes as a surprise, has a major effect and is often inappropriately rationalized after the fact with the benefit of hindsight).  As an example the Tech Crash in 2000, the financial crisis in 2008 and most recently COVID.  Black Swans can dramatically affect one’s psychology, health and most definitely one’s finances and how they react to such events.  In other words in the financial arena, we all know we should buy low and sell high, but in the real world most people commonly sell low and buy high which is counterintuitive.  What happened to Blue Light Specials?  (K Mart).

Social Security & Uncertainty

Last month while in Wisconsin I spent time with a good friend of mine and we had a conversation as it relates retirement planning and Social Security.  I told Pat it’s really quite simple there are 3 types of expenses that you have:

NEEDS – absolutely have to have.  Example;  Food, Clothing, Shelter, Etc.

WANTS – things you’d like to have, but can live without.  Example; Trips, Country Clubs, Etc.

WISHES – things you’d like to do.  Example; Leaving money to grandkids, charities, etc.

Social Security, Pensions (if so fortunate to have one) and possibly Annuities guarantee a lifetime income.  These and only these should cover your NEEDS or what I call Cover the Nut.  If you have needs of $5,000 per month, then you’d want to have $5,000 per month in guaranteed lifetime income.  Since Social Security benefits are twice as much at age 70 vs age 62 then you might consider using a bond or CD ladder to give you income between age 62 and 70, this is where planning comes into play, it’s integrating all of one’s assets and resources including work into the planning process.

I purposely do not use stocks, bonds, etc. to cover needs due the market conditions and use these assets to cover the WANTS.  As an example in good year’s you might go to Europe or take a cruise, but in bad market years you might cut back and take a trip to Galveston (nothing against Galveston).  It’s flexibility to manage one’s expenses and not getting out of the market at the wrong time!  {See Black Swans above}

The bottom line is that Social Security is a critical component of retirement and provides lifetime inflation adjusted income for both you and your spouse.   It’s an irreversible decision that will have consequences for decades to come, so one needs to make sure you make the right decisions before pulling the trigger!   “Measure Twice – Saw Once”  Carpenter’s Rule

Have a Happy Thanksgiving & never hesitate reaching out, if you think I can be of assistance,

Have a great month,

Dave Zander, CFP®
MLS# 1603774