When you retire, you may well have accomplished some important financial goals, such as sending your children through college and paying off your mortgage. Yet, you can’t relax just yet, because your retirement could easily last two or three decades, which means you’ll need at least two or three decades’ worth of income — which, in turn, means you’ll need the proper savings and investment strategies in place. And, just as importantly, you’ll also need to be aware of the types of risk that could threaten these strategies.
Let’s consider some of these risks: Longevity — None of us can say for sure how long we’ll live. But it’s still important to have an estimate, based on your health and family history. So if you think you may live, for 25 years in retirement, you’ll want to withdraw enough from your investments each year to enjoy a comfortable lifestyle — but not so much that you deplete your funds before the 25 years have passed.
Inflation — We’ve experienced pretty mild inflation over the past few years. But over time, even a low rate of inflation can seriously erode your purchasing power. To illustrate: If your current monthly costs are $3,000, with only a 3% annual inflation rate, that would be about $4,000 in 10 years. And in 25 years at that same rate, your monthly costs will have more than doubled, to about $6,200. To help protect yourself against inflation risk, it’s important to have at least some investments that offer growth potential, rather than only owning fixed-income vehicles, such as certificates of deposit (CDs). You’ll also want to consider sources of rising income potential, such as dividend-paying stocks. (Keep in mind, though, that stocks can reduce or discontinue dividends at any time and are subject to market fluctuation and loss of principal.)
Market Fluctuations — When you retire and begin taking withdrawals from your investment portfolio — that is, when you begin selling off investments — you’d obviously like prices to be high. After all, the classic piece of investment advice is “buy low, sell high.” But it’s impossible to try to “time” the market this way, as it will always fluctuate. That’s why you may want to consider sources of income whose value is not dependent on what’s happening in the financial markets. Your financial advisor may be able to recommend investments that can provide you with this type of income stream.
Low interest rates — Many retirees depend on fixed-rate investments for a good portion of their retirement income — so it’s a real challenge when interest rates are low. Consequently, when you retire, you’ll certainly need to be aware of the interest-rate environment and the income you can expect from these investments. Longer-term fixed-rate vehicles may be tempting, as they typically offer higher rates than shorter-term ones, but these longer term investments may have more price fluctuation and inflation risk than shorter-term investments. Consequently, you’ll still likely need balance between short, intermediate, and long-term investments to provide for a portion of your income in retirement.
Retirement can be a rewarding time in your life. And you can help make your retirement years even more enjoyable by understanding the relevant investment risks and taking steps to address them.