It’s easy to take for granted the sorts of strategic moves that can help you to fully finance a comfortable retirement. David Cyrs, of Cyrs Wealth Management, highlights some common risks, and know how to respond.
Three major retirement risks include market volatility, inflation and longevity risk.
Market volatility: It can cause frustration before retirement. But during retirement, a lack of growth can devastate your financial plans. Keep in mind any market declines as you are withdrawing for income, since your assets will have to work harder to keep you on track.
Inflation: Remember what you used to buy for a dollar? Today you may need as much as $5.76 to buy what you did with $1 in 19701. That is an example of inflation in action, and your retirement needs to keep pace or beat it, in order to preserve your purchasing power. If inflation grows faster than your investments, you’re actually losing money.
Longevity: The good news is that Americans are living longer. One of four women presently reaching the age of 65 will live to age 94. For men, it’s age 922. Living a longer life requires you to make your retirement savings last even longer.
There are many ways to plan for and acquire income during retirement. A common approach is known as systematic withdrawal. But, it’s important to take into account where in a market cycle you’re starting to draw retirement income. An economic downturn similar to 2001-2002 and 2008-2009 in the early years of retirement can dramatically affect future withdrawals. This makes it all the more important to also consider balancing the risk of early retirement downturns with the need for income throughout retirement. The volatility and unpredictable nature of financial markets means every investor runs the risk of running out of money in retirement, particularly with losses in the early years of retirement.
At times, it can appear the deck is stacked against you. But it doesn’t have to be. There are ways to mitigate risks, and a planning process can incorporate them. Consider the following steps:
• Estimate the duration of retirement assets
• Identify and manage retirement risk (including market volatility, inflation and longevity risk)
• Identify distribution tax and estate issues and opportunities
• Identify options for addressing gaps to desired income
• Convert resources into income
• Maintain and update your plan with an independent advisor on an annual basis
Today, many retirees aren’t ready to settle for an unstructured life full of Sundays. Instead, they may be busy pursuing their passions, going back to school, joining the Peace Corps, starting new businesses, traveling to exotic places, reconnecting with far-flung friends and family, tackling athletic challenges, and sharing their talents and skills with others. These factors also come into play in arriving at desired income levels during retirement.
So, as you plan for retirement financially, it’s also important to more than just visualize your next stage of life. Getting there means making a plan to achieve your goals. It is one key to enjoying the productive, fulfilling retirement you’ve envisioned.
David M. Cyrs, M.S., AIF, CRC, is a CERTIFIED FINANCIAL PLANNER™ at CYRS Wealth Advisors, 1111 S. Alpine Road, Ste. 701, Rockford. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor.
1. Based upon consumer price index for all urban consumers (CPI-U) 1970-2012. Source: U.S. Department of Labor, Bureau of Labor Statistics.
2. Annuity 2000 Mortality table, Society of Actuaries.