Imagine you’ve saved your target amount for retirement and are on track to receive your optimal Social Security benefit. Many think these are the only things to take care of, but retirement planning consists of much more. It’s also crucial to consider how much risk you’re taking and how much risk your money can manage. No one can predict the next 30 years of market ups and downs, how long they’ll live for, or what their tax rates will be in 10 years. Here’s what to consider when assessing risk in retirement.
Market Risk
Chances are most retirees will have to live through at least one bear market. In fact, the average retiree will likely face three to five such bear markets in retirement.[1] It’s important to consider historical trends like these, as well as possible worst-case scenarios. Take the COVID-19 pandemic: Few foresaw it, or its full effect on the market. But, many panicked and sold before seeing a recovery and may have experienced a significant financial setback in or close to retirement. There could be long term implications due to sequence of returns risk. This happens when someone takes withdrawals during a down market without allowing their portfolio to recover first. The result is that retirement savings could run out faster.
Longevity Risk
Market volatility isn’t the only thing you may need to be concerned about in retirement – or should have a plan for handling. While a longer life is certainly a blessing, with it comes the risk of outliving your money. Considering the often expensive healthcare costs in old age, the staggering cost of long-term care and the fact that Americans continue to live longer, running out of savings in retirement is certainly a possibility. However, there are options for protecting against longevity risk. Pension or no pension, have a plan for creating retirement income for life. This plan can include a reliable income source that isn’t affected by market drops and continues to pay out for as long as you live. There is also the option of income that pays out for the rest of a spouse’s life after the first spouse’s passing.
Tax Risk
While you may not think of taxes as a risk factor, the fact that they can be raised makes them a risk. This is especially true if you have a significant amount of money saved in a taxable account like a traditional 401(K) or IRA, own real estate, or want to pass on your wealth in a tax-efficient manner. Taxes may be relatively low right now compared to later in your retirement. Most of the provisions in the Tax Cuts and Jobs Act will expire at the end of 2025[2], and no one can predict what could replace it in the future. By taking advantage of current rates and working with a professional, you can create a long-term tax minimization strategy for retirement, and adjust it as needed.
The bad news is that many potential risks come with retirement. The good news is that we are here to help you plan for them and adjust your plan as needed. We don’t have a one-size-fits-all approach, and we don’t look at the many elements of your retirement plan as separate. We help our clients create comprehensive retirement plans that take their unique financial situations and needs into account.
[1] https://www.prudential.com/advisors/insights/retirement-readiness/managing-risks-to-retirement
[2] https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-personal-taxes
Epstein & White Financial, LLC (“Epstein & White Financial”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. A copy of Epstein & White Financial’s current written disclosure statement discussing our advisory services and fees is available for review upon request or at www.adviserinfo.sec.gov.
Epstein & White Retirement Income Solutions, LLC (“Epstein & White Retirement”) is a licensed insurance agency with the State of California Department of Insurance (#0K53785). All investment advisory and financial planning services are provided only through Epstein & White Financial.
Information contained herein is for informational and illustrative purposes only and general in nature. It should not be considered investment advice or a recommendation to buy or sell any type of securities or insurance products and no investment decision should be made based solely on any information provided herein. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.
Investment in securities carries a risk of loss, including loss of principal amount invested. Different types of investments involve varying degrees of risk. It should not be assumed that diversification or asset allocation protects a portfolio from loss or that such will produce profitable results.
