In some ways, climbing the career ladder and growing your nest egg is relatively easy. You always have another paycheck to fix your previous mistakes, you have much more control over your financial life, and time is on your side. On the other hand, retirement is a minefield of risks, some of which are entirely out of your control. However, awareness of these risks is the first step to creating a financial plan to help sidestep those retirement mines- or at least cushion the blow if you hit one.
Longevity Risk
This risk is a double-edged sword. We all wish for a long life. However, the longer you live, the greater your chances of running out of money. Trying to determine your lifespan is not only unpleasant but also quite tricky, barring any major illnesses. Also, if you think you can just plan around the average life expectancy for your gender, it’s not that simple.
The current American life expectancy in 2024 is 79.25. However, that figure is misleading, as it factors in early deaths from accidents and illnesses and other early deaths, none of which we factor in while retirement planning. The reality is that once you reach full retirement age (currently 67), your life expectancy is well beyond your life expectancy at birth. Looking at the Social Security Administration’s 2023 Acturial Table, we can see that a 67-year-old in 2020 could expect to live another 15 years. From there, it gets even trickier. An 83-year-old could have expected to live approximately another six years, and an 89-year-old could expect to live another four years.
The older you get, the longer you can expect to live. To a point, obviously.
So, what do you do? Plan to live until 100 and live frugally just to pass away at 83? You could, but you won’t have the retirement you deserve!
Also, there’s another wild card making itself known. Recent advances in AI technology and anti-aging drugs are showing great promise in extending already increasing life expectancies, with some estimates predicting 20—to 30-year increases. Are you ready to live until 110 or longer? And are your savings?
Market Risk
Since its introduction in 1980, the 401(k) has gradually overshadowed the pension system. Initially intended as an additional savings option for Americans planning for retirement, it has rapidly evolved into a replacement. As a result, more and more Americans are depending on the stock market’s performance for a comfortable retirement.
On paper, it looks good—the stock market has only grown in value in the long run. However, just because the stock market has gained in value over time doesn’t mean your 401(K) or portfolio will. In fact, even if your 401(K) does at least keep pace with the S&P 500, high fees may easily cut a significant portion out of your earnings, not to mention taxes.
The Sequence of Returns Risk
Now let’s imagine that a stock market crash occurs at the most inopportune of times – the eve of your retirement. Lower-than-expected values will require you to offload a disproportionate amount of your assets to make up for it. Your reduced overall portfolio value may have difficulty generating the compound gains necessary to make it through retirement.
One could argue that’s precisely why we purchase more bonds as we get closer to retirement, minimizing the impact of a stock market crash. And to a degree, they would be correct. However, do bonds alone generate the necessary interest to overcome inflation, annual withdrawals, and longer lifespans? Also, unless you park your bonds in a Roth account, the IRS will subject them to higher ordinary income tax rates.
US 10-Year Treasury Bond Note Yields
Does this mean that bonds don’t have a place in your portfolio? They likely do. However, the unpredictable factors of inflation and life expectancies may render their performance insufficient for a long retirement.
Inflation Risk
We’ve already mentioned inflation several times, and for good reason. Inflation is the insidious killer of your savings, and it could take years to really feel the pinch. Suppose you retire at 62 – coincidentally coinciding with the age at which you can receive Social Security benefits – and live to the ripe old age of 92. Assuming a 3% inflation rate, it would take 24 years for the dollar to lose half of its value.
Of course, that’s why you have assets that continue to generate compound gains, right? Well, as we can see in the chart above, long-term treasury bonds don’t always keep up with inflation and sometimes lag far behind. If stock markets are on a downswing, you’ll quickly feel the rising cost of the most basic of goods, such as groceries, rent, fuel, and utilities. As the cost of living rises, what was once considered a comfortable retirement income can rapidly become insufficient, forcing unwelcome adjustments in your spending habits and lifestyle. And the longer your retirement and lifespan, the more of an effect inflation will inflict on your savings.
Medical Expenses
The medical system in America is extremely costly, and Americans spend more on medical expenses per capita than anyone else. Oh, right, you’ll have Medicare.
Unfortunately, Medicare doesn’t cover everything, such as long-term care. With a 70% likelihood of requiring long-term care for someone turning 65 today (and a 20% chance for five years or longer!), the cost of a private nursing home room can quickly deplete savings, averaging over $120,000 annually in 2024, and depending on your state, it could be much higher.
To make matters worse, Americans turn to their Social Security benefits. In fact, a healthy 65-year-old couple retiring in 2024 is expected to spend almost 70% of their lifetime Social Security benefits on medical costs during retirement.
Final Thoughts
As we circle back to our initial thoughts, it’s clear that the path to retirement is more complex than simply saving part of your paycheck and working your way up the career ladder. Risks are afoot around every retirement corner, and many are difficult, if not impossible, to predict.
So, who’s leading the way in your retirement planning – you or fate?
If you don’t have a plan in place that can help avoid or mitigate the risks we’ve discussed, we urge you to reach out while there’s still time. If you have a plan and would like a second opinion, we’d be happy to provide one. You can schedule a no-obligation consultation in the calendar below!
Please Note: The information contained in this article is general in nature and for educational purposes only. Cornerstone Financial Services Group does not provide tax advice and one should always consult with their tax professional regarding their specific situation.
