Many retirees can expect to live another 20 years, and some people will live to age 90 or beyond. That means you might need to pay for several decades of retirement. But once you’re retired, you live on a fixed income. There are no merit raises, bonuses or employer contributions to your retirement account. So even if you can afford your current lifestyle, you should consider what’s going to happen over the next 20 or 30 years. Here are five issues to take into account when planning your financial future.
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1. Stock market declines. The stock market has been going up for close to 10 years and has been hitting a series of historic highs. But as recent events show, the market is not always a one-way street to prosperity. So perhaps the most obvious risk to your retirement nest egg is another 2008-style market collapse, when the market declined almost 40 percent, or even worse, a three-year decline like what happened from 2000 to 2002. Nobody can predict when the next bear market will come along and cripple your IRA, but you need to be prepared when the next one does show up. Take care to select investments that will generate a steady income, and take steps to avoid outliving your money.
2. Rise in interest rates. Interest rates have been in a long-term decline since the early 1980s. With few exceptions, bond investors have benefited not only from the interest they’ve received, but also from the increasing value of their bonds. However, while bond prices increase when interest rates go gown, they also decline when interest rates increase. Recently, interest rates have reversed course and gone up for the past few months. If interest rates continue to rise, the bonds or bond mutual funds you own could lose value.
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3. Inflation. Inflation has barely budged for the last few years. The official interest rate was just 2 percent for the last 12 months. However, the overall interest rate doesn’t necessarily reflect the costs you pay at the gas station or for a heating bill. For example, the price of energy has gone up by 7 percent since last year. And if you look at what’s happened over the past 30 years, prices have more than doubled since 1988, according to the U. S. Bureau of Labor Statistics. Whatever cost $100 in 1988 now costs around $215. And costs for medical care have grown even faster. Fidelity Investments estimates that a 65-year-old couple retiring in 2017 will need an average of $275,000 to cover their medical expenses throughout retirement, over and above what Medicare pays. That estimate has increased by $15,000 from just 2016.
4. Your individual financial risk. Most pensions are insured by the federal government. If your former employer goes bankrupt, your pension is likely insured by the Pension Benefit Guaranty Corporation. But public pensions and some private employers, especially small companies, are not covered. Other individual risks include your local real estate market, which could affect the value of your home, and the financial strength of your insurance company, which could affect your future coverage.
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5. Health risk. A major cause of unexpected bills in retirement is medical expenses. Health care costs can be a problem even for people who have health insurance due to high out-of-pocket costs. A rare or serious disease can result in hundreds of thousands of dollars in medical bills for hospital stays, medical procedures and prescription drugs. So make sure your medical insurance is up-to-date and appropriate for your needs. Don’t underestimate the value of healthy foods and regular exercise. Also, consider purchasing long-term care insurance.
There’s no reason to panic over any of these risks, but you should prepare for them. Keep your retirement accounts in a diversified portfolio of stocks and bonds, with enough cash to cover foreseeable needs and unexpected expenses. Have several sources of income, including Social Security, a pension and your own savings. Take care of your health as best you can. And nurture a network of family and friends who you will help if they get in trouble, and who can help you out if and when you need it.
Tom Sightings is the author of “You Only Retire Once” and blogs at Sightings at 60.
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5 Financial Risks in Retirement originally appeared on usnews.com
