May 11, 2023
There’s fresh worry that Americans haven’t stashed away enough money to retire: A recent survey measuring confidence in retirement savings points to a fatalism among adults that their wealth will not last through their post-work years.
Dig deeper and the news gets even more unsettling: Among those who lack confidence in their retirement resources, 4-in-10 say it’s because they’ve saved little to nothing.
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Yet to borrow from the glass-of-water analogy, the piggy bank in this case is half empty and half full.
First, the good news: According to AARP, there’s time at nearly any age to recover and put enough aside to enjoy those golden years. Now the bad: Regardless of your nest egg’s size today, risks lurk around every corner. Indeed some can’t be avoided — in fact, a few are affecting us all right now. But all can be managed. Here’s how.
1. Inflation
By textbook definition, inflation involves the gradual increase in the price of goods and services over time. And in terms of everyday language, it inspires a lot of swearing.
By eroding the purchasing power of retirement savings, inflation puts retirees on fixed income at peril. For example: Using a CPI calculator, you’ll discover that $2,000 in expenses in the year 2000 amounts to $3,500-plus today: an increase of more than 75%.
Yes, inflation is cooling off compared to last year. But it’s important to consider the long-term impact on retirement savings.
Retirees should look at investments with a history of hedging against inflation. These include real estate, commodities and bonds. For very conservative older investors, online banks offer some of the safest harbors around, with high-yield savings accounts at or near 5% at many institutions. If you’re feeling more aggressive, you might consider assets like stocks.
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2. Outliving your savings
As longevity increases, retirees must ensure that their savings can keep pace. The Social Security Administration’s life expectancy calculator says a man turning 65 today can expect to live until age 84.3, and a woman turning 65 today can expect to live until age 86.7.
You can counter the risk of financial depletion with a guaranteed lifetime income annuity or by delaying Social Security benefits, with the latter delivering several hundred extra dollars per month.
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Depending on when you were born, the full retirement age for 100% benefits lands at about 66 or 67 — but if you hold out until age 70, your benefits come in even higher. In fact, you could receive an 8% boost for every year you wait.
3. Health care costs
As people age, their health care needs generally increase. These costs can be significant in retirement — and an unexpected medical emergency can quickly deplete retirement savings.
According to Fidelity, a 65-year-old couple retiring in 2021 can expect to spend an average of $300,000 on health care expenses throughout their retirement. To reduce this risk, retirees could purchase long-term care insurance or explore options available through Medicare.
There’s also that ounce-of-prevention thing: Don’t overlook the value of staying active and fit, whether measured by quality of life or quantity of dollars saved. Walking especially reduces the likelihood of chronic health conditions and costly doctor visits.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
4. Market ups and downs
Imagine what retirees have gone through over the last two years as they watched Wall Street take a dive. For those with significant savings in the stock market (especially in growth stocks), it’s all about beating back precarious risk and vulnerability.
While equity investing can provide significant returns, a diversified investment portfolio includes both stocks and bonds. In fact, retirees should think about reducing exposure to equities as they approach retirement to minimize the impact of any market downturn.
5. Timing your withdrawals
Withdrawal risk represents the impact of taking out too much money from retirement savings, particularly in the early years. It’s a surefire way to leave you empty-handed in later years.
Look at a retirement withdrawal strategy that balances expected costs, investments and sources of income. The popular 4% rule suggests withdrawing that amount of retirement savings in the first year and adjusting for inflation in subsequent years.
Anyone who’s made it to retirement knows that life is full of risks. Those wise enough to have thrived know financial risks must be met head on; you ignore or hide from them at your own peril. Fortunately, traps are nothing new and the best strategies to avoid them are time tested — that is, they never need to be retired.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
