The savvy vegetable gardener must mitigate insect risk and rodent risk, drought risk and weed risk, nutrient depletion risk and dead seed risk; the effective mitigation of all but one deadly peril can result in a fruitless garden! Likewise, planning a financially resilient retirement requires identifying and mitigating the following seven hazards, each of which can upend a retiree’s financial life.
- Market Risk involves the possibility of a dramatic decline in asset prices which can leave insufficient capital to fund retirement income needs. Potential mitigation strategies include portfolio diversification consistent with one’s risk profile, proper position sizing, and maintaining an exit plan on risky holdings from the time of purchase. Converting a portion of invested assets into a permanent income stream may help reduce market risk.
- Interest Rate Risk concerns the negative impact that a significant change in market rates can have on a retiree’s income and/or assets. Declining interest rates equate to less annual income on newly purchased fixed income holdings, like CD’s, fixed annuities, and government bonds. Rising interest rates cause outstanding bond values to fall and can result in investment losses.
- Sequence of Returns Risk applies to the disproportionately damaging effect that a bear market proximate to one’s retirement date has on portfolio values. Mitigation strategies include a reduction in portfolio risk during the ‘retirement date’ period, reducing account withdrawals until the market recovers, and a partial conversion of stocks into a lifetime income stream.
- Inflation Risk, perhaps the most difficult of the major hazards to perceive, nibbles away at the purchasing power of each currency unit the way a potato bug does the plant’s nutrient-enriching leaves. Delaying Social Security benefits and allocating a meaningful portion of invested capital in assets which have outperformed inflation over time, like high quality stocks, real estate, and other real assets, can be useful inflation-fighting strategies.
- Risk of Increasing Income Tax Rates is a terrifying proposition to the retiree with 100% of their capital sitting in a Traditional retirement account, yet with both Social Security and Medicare running large deficits, and while presently residing in a relatively low-tax era, the threat is real. Thoughtful asset ‘location’ between taxable, non-taxable (Roth, HSA), and tax-deferred (Traditional) investment accounts, and engaging an ongoing and effective tax management plan can help reduce exposure to this risk.
- Long-Term Care (LTC) Risk, or the potential for a calamitous increase in retirement expenses due to the high cost of care late in life, can impoverish a retired spouse and vaporize legacy assets! Effective mitigation strategies include familial caregiving, advanced trust planning, Long-Term Care insurance, and Medicaid planning.
- Longevity Risk involves the possibility a retiree will live longer than expected and, therefore, need to fund additional years of spending. Delaying Social Security benefits, purchasing a deferred income annuity or a Qualified Longevity Annuity Contract (QLAC), and monitoring the Retirement Income Plan can help contain this risk.
On a scale of 1-10, what is your personal exposure to each of these threatening perils? Which of the potential mitigation strategies are most agreeable with your planning and investment temperament, and most consistent with your financial plan? May your efforts be blessed, and your plan prove fruitful. Shaun
“The prudent sees danger and hides himself, but the simple go on and suffer for it” ~Proverbs 22:3
Disclosure:
This commentary is provided for informational and educational purposes only and is not intended as personalized investment, tax, legal, or financial advice. Old Forge Wealth Management, LLC is a registered investment adviser. Any opinions expressed are as of the date of publication and are subject to change. Investing involves risk, including the possible loss of principal. Diversification and asset allocation do not ensure a profit or protect against loss in declining markets.
This material may reference general planning strategies, including retirement income planning, Social Security claiming strategies, tax management concepts, insurance planning, annuities, long-term care planning, and Medicaid planning. These strategies may not be appropriate for all individuals and should be evaluated in light of your objectives, risk tolerance, time horizon, financial situation, and overall plan.
References to tax rates, Social Security, Medicare, or other government programs are based on current understanding and may change due to future legislation, regulation, or administrative guidance. For advice specific to your situation, please consult with your tax professional and/or attorney.
Annuities, including deferred income annuities and Qualified Longevity Annuity Contracts (QLACs), are insurance products and are subject to the claims-paying ability of the issuing insurer. Guarantees are based on the financial strength of the insurer. Riders, fees, expenses, surrender charges, liquidity restrictions, and tax consequences may apply.
Long-term care planning and Medicaid eligibility are complex and vary by state and individual circumstances; professional guidance from a qualified elder law attorney is recommended.