Finance

Take These 3 Risks Into Account When You Retire

May 13th, 2019

There are obvious risks that come with retirement: market changes, bad investments and unexpected health changes are common worries for folks approaching retirement age. Even so, some risks that don’t immediately come to mind when thinking about retirement. Here are some risks many people don’t consider but that are still important to prepare for.

Don’t get complacent.

If you set a retirement savings rate early in your career and haven’t changed it since then, you’re still building your nest egg. However, your financial situation will probably be very different when you’re twenty than it is when you’re fifty. If your budget isn’t as tight as it once was or you set a default contribution rate and never changed it, you might have become complacent.

The biggest pitfall of becoming complacent is discovering that your egg hasn’t grown as much you expected it to. The best way to prevent this risk is to take a look at your account balance and make sure you’re still making progress toward your goals.

Use available online tools like retirement calculators to give yourself a retirement checkup. Retirement calculators work by taking information such as your income, current retirement account value, annual savings information, and expected retirement age and estimating the probability of achieving your goal.

If the calculator estimates that you’re less than 80 percent likely to reach your goals, it’s time to reassess your financial situation and adjust your savings and investment plans and consider your lifestyle expectations for when you retire.

Don’t be impulsive.

Emotional risk can have a big and disastrous effect on your retirement plans. It’s only natural to respond emotionally to market highs and lows, but allowing these highs and lows to dictate your investment strategy can damage your retirement prospects.

To combat this risk, set your strategy in stone. Putting your asset-allocation strategy in writing increases your chances of sticking to that strategy when the market fluctuates. Tools like Vanguard can help you determine a risk-tolerance asset mix.

It’s important to check in on your holdings from time to time to make sure gains and losses haven’t given you an unbalanced portfolio and taken you too far off of your target, but setting a strategy and holding yourself accountable is a good way to make sure you’re where you want to be.

Don’t underestimate your longevity.

The possibility that you might live longer and thus experience a longer retirement seems like it might only be an issue once you’re retired.

The danger of this problem is that it’s something you only think about after you retire rather than before. If you underestimate how long you’ll live, you could find yourself outliving your retirement savings. Assuming you’ll need twenty years of savings to support yourself in retirement could be a problem if you live thirty years in retirement, and it’s going to be hard to save enough money to maintain your desired lifestyle.

LongevityIllustrator.org provides estimates that can help you understand how long you’ll live in retirement based on factors such as age, gender, and health by providing an average estimate. If this number is higher than you expect, reassess your savings and how much you can afford to spend in retirement.

While this won’t eliminate longevity risk entirely and might not factor in unexpected health changes, it can help you better prepare for an unexpectedly long retirement.

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