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Wealth Management, Investment & Wealth Management

Avoiding Risk Related to Retirement

Just like other areas in life, retirement comes with risks. It’s important to prepare yourself and do what you can to mitigate any harm. One of the biggest concerns when it comes to retirement is if the money will last as long as it needs to. There are always risks with investing and knowing what those risks are, and more importantly, knowing how to mitigate those risks, is key to ensuring your retirement funds will last as long as they need to.

Security in investing is often associated with knowing what you need to be aware of so that you can protect your nest egg. Knowing the risks makes it easier to set up a plan of action to avoid those risks.

Risk #1 - Life Expectancy

As of 2020, the average American can expect to live approximately 79 years. That’s an average. Many people are living well into their 80s and 90s, which means they’ll need their retirement money to last longer than ever. Although Social Security lasts until you die, it’s not enough to live on. The gap, whether small or large, between Social Security money and your retirement funds needs to be accounted for. This may mean you should start saving more or adjust to live on less. You can suffer now with putting more away, or suffer later by not having enough.

Risk #2 - Not Starting Early Enough or Contributing Too Little

Since Americans are living longer, it’s a good idea to start contributing to a retirement plan as soon as possible. Many people in their 20s and even 30s think about it, but don’t do anything about it. They may mean well and have good intentions, but that won’t pay the bills during retirement. In addition to putting off contributing to a retirement plan, some people only contribute a small amount. While that’s better than nothing, it probably won’t add up fast enough. Another mistake is taking money out when moving to a new job. It can be tempting, but very unwise. All of these scenarios are bad news when it comes to account balances in the long run and can cause retirement in-security.

Risk #3 - Not Managing Your Emotions

The market fluctuates from day to day, month to month, and from year to year. That’s just what it does. If you find yourself getting nervous when the market dips, consider not watching it so closely. Investing for retirement should be looked at as a long-term strategy, not a short-term goal. Historically, the stock market has always gone back up after a dip. It may happen in a short timeframe or it may take months, but it has always gone back up. Try to remember this when you start getting worried. The more you understand how the markets work and accept it, the easier you should feel about your investments.

Risk #4 - Forgetting About Inflation

It can be difficult for some people to trust the stock market and they may want to keep their money in a money market account or some other cash equivalent fund. While these may be ‘safer’ places to keep the money, the returns or interest they pay don’t keep up with inflation. So every day the money is in one of these accounts, when you factor in inflation, it’s like you’re actually losing money. No one wants that. Even though it may seem like a conservative investment, it’s really too conservative. As with anything, the more you know about something the less frightening it can be.

The Allianz Life Insurance Company of New York published their 2020 Retirement Risk Readiness Study. They found that 65% of people who were close to retirement stated they planned to continue working at least part time after retiring. Yet, of those who had actually retired, only 7% were actually doing some type of work. Half of the people in the study said they retired earlier than they had planned, mostly due in part to factors outside of their control, while 34% of that group had an unexpected job loss, and 25% retired early due to their health.

So what does the study show us? Things don’t always go as planned. Maybe you’re thinking you’ll work until you’re 65 - but what happens if you have a health issue come up and you’re no longer able to work? What if you’re even older and lose your job? These are things to consider when mitigating risks surrounding your retirement fund. After all, it’s not too often (if ever) you hear people say, "I wish I wouldn’t have saved so much!"

The best way to avoid risk and to ensure that you’ll have enough savings for retirement is to talk with a financial advisor. This will give you the opportunity to discuss your goals for retirement as well as any concerns you may have regarding your finances.

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