Risks Retirees Face
This blog will be presented in two parts. In the first part, I will discuss the three most substantial risks retirees face, and the second part will discuss four other risks.
Inflation – As discussed in a previous blog about real return, inflation plays a large role in the ability to maintain your standard of living in retirement. Historically, average annual inflation has been from 3.0% to 4.0% depending on the time frame considered. We are currently using a long-term inflation rate of 3.25% when forecasting client total expenses. The rule of 72 is a simple calculation to show how long it would take your money’s value to halve due to inflation or double based on returns. You just divide 72 by the rate of inflation (or return) to see how many years it would take to halve (or double) in value.
Withdrawal rate – The rate at which you withdraw from your retirement assets is a primary factor when determining how long your assets will last. Below is a graphic showing the probability of your money lasting through a 25 year retirement at different withdrawal rates and asset allocations. We usually assume a life expectancy of 97 so we tend to invest slightly more in stocks to produce additional growth to protect our client’s purchasing power.
Longevity – With advancements in medical treatments and technology retirees are living healthier and longer lives. This means that your money will need to last through a longer and more active retirement. With a longer life expectancy, the rate of inflation and your withdrawal rate will play an even greater role in determining your chances for long-term financial security. At the same time, medical advances will increase your total medical expenses which have generally outpaced the rate of overall inflation. Below is a chart showing the probabilities of a 65 year old living to various ages.
The inflation rate, your withdrawal rate and your longevity are linked together and will play a major role in determining your long-term financial success.