Monetary inflation, the rising cost of health care, longer life span, and other potential circumstances are only some of the obstacles you may come to face when you retire. Without being properly prepared when plans go awry your dream of a comfortable life later on may be greatly compromised.
Even if you had substantial savings in place (in a Traditional IRA, Roth IRA, CD, 401(k) or company sponsored pension fund) some unforeseen events can easily drain your retirement savings. Those approaching retirement age need to be aware of the risks to be considered that determine retirement income. Outlined below are the five biggest destructive setbacks and how you can minimize the financial impact of each risk.
Risk 1 – The cost of health care
The aging population means that the costs of health care are ever rising, not only in the US; this is a worry for all countries in the developed world. It is no longer the case that employers will automatically offer medical insurance in retirement to former workers, and there may be funding shortfalls in programs such as Medicare. It is estimated that those who have no insurance funded by their former employer could need hundreds of thousands of dollars for health care during the retirement years. This does not include long term or nursing home care costs.
Risk 2 – Longevity
People are living longer than ever before and while this is good news in many ways, it means that people will need more funds in retirement. Individuals are living into their 90s so it could be that retirement funds will need to last for 25 to 30 years.
Risk 3 – Inflation
Inflation will increase the cost of everything that a person needs to live, from food to utilities, and retirement planning should cater for this. Even low inflation rates can have a significant impact on retirement funds. Some pensions or annuities can be adjusted to allow for inflation but there are many that cannot.
Risk 4 – Getting the strategy right
The right investment strategy is essential. One that is on the conservative side may not perform well enough to meet the financial needs of retirement, however, an aggressive strategy may carry too many risks. The ideal strategy will be somewhere in the middle. Never put all your eggs in one basket is excellent advice that is relevant to financial matters. A mixture of cash, bonds and stocks is the best option.
Risk 5 – Drawing from savings
Withdrawing too much from retirement savings can put the financial future at great risk. Early withdrawals will reduce the overall amount and this could easily be further affected by a downturn in the economy. Financial experts estimate that withdrawing more than 5% leaves an investor at risk of seeing their retirement fund dwindle to virtually nothing when the funds are still required.