Are You Afraid of Outliving Your Money?
As retirement nears, many people worry about the possibility of outliving their savings. This concern is understandable, given longer life expectancies and increasing healthcare expenses. However, with the right strategies and tools, we can help alleviate this worry and support a thought-out future.
Understanding the Concern
For many, the thought of running out of money in retirement stems from a few key uncertainties:
– Longevity: People are living longer than ever before, increasing the need for a sustainable income.
– Healthcare Costs: Medical expenses often rise significantly later in life.
– Market Volatility: Investment returns can fluctuate, potentially impacting your nest egg.
– Inflation: Over time, rising costs erode purchasing power.
– Sequence of Returns Risk: This occurs when the timing of poor market returns, particularly early in retirement, reduces the longevity of your portfolio. This critical topic requires careful planning and will be discussed in a future post.
Without a structured approach, these factors can create financial stress. The good news? You don’t have to face these challenges unprepared.
Solutions to Help You Navigate Retirement with Confidence
1. Create an Income Policy Statement (IPS)
An Income Policy Statement is a personalized guide for how much income you can safely withdraw from your portfolio. It uses guardrails to help you make adjustments:
– Ceiling (Upper Guardrail): If your portfolio grows beyond a certain threshold, you can increase your income.
– Floor (Lower Guardrail): If your portfolio declines, the floor indicates when to reduce income to preserve assets
2. Time Social Security Strategically
Social Security is one of the most reliable income streams in retirement, but when you start taking benefits matters. While you can claim as early as 62, delaying benefits until full retirement age—or even age 70—can result in significantly higher monthly payments.
However, every situation is different, and careful analysis is needed to determine what makes sense for you. If you are married, this becomes even more complicated due to spousal and survivor benefits. Your health and longevity also play a crucial role. At the risk of sounding salesy: if you’re unsure, we offer a free Social Security analysis to help you make an informed decision.
3. Evaluate Annuities with Caution
Annuities can provide guaranteed income for life, making them a potential solution for addressing the fear of outliving your money. However, not all annuities are created equal. They’re complex products, and careful consideration must be taken when evaluating if an annuity is right for you.
Here are some key points to consider:
– Complexity: Annuities have many variations, including fixed, immediate, deferred, and equity-linked annuities. Understanding the differences is essential.
– Customization: The terms, fees, and benefits vary widely depending on the type of annuity and the company offering it.
– Suitability: Annuities may make sense if you value guarantees and are comfortable locking up a portion of your funds. However, they may not be ideal if flexibility and lower fees are more important to you
Before purchasing an annuity:
– Determine if it fits into your overall retirement plan.
– Compare options across multiple companies.
– Consult a financial advisor to fully understand the benefits, trade-offs, and long-term implications.
4. Plan for Sequence of Returns Risk Sequence of returns risk is the danger that poor market performance early in retirement will drain your portfolio faster than expected. Strategies to manage this risk include:
– Maintaining a cash reserve to avoid selling investments during a downturn.
– Adopting a bucket strategy to allocate funds across time horizons.
– Incorporating guaranteed income products like annuities or pensions.
We’ll explore this topic in greater detail in an upcoming post to help you navigate this significant risk.
5. Regularly Review and Adjust Your Plan
Your retirement plan shouldn’t be static. Life changes, markets shift, and your priorities evolve. Regularly review your plan to:
– Reassess your goals and expenses.
– Account for inflation and healthcare costs.
– Rebalance your investment portfolio to maintain your desired risk level.
Staying proactive allows you to make incremental adjustments rather than facing large, reactive changes.
6. Diversify Income Sources
Relying on one- or two-income streams in retirement can be risky. A diversified approach might include:
– Social Security
– Retirement accounts (401(k), IRA) •
– Annuities
– Rental income or other investments
Diversification reduces your reliance on any single source, providing greater stability.
7. Plan for Long-Term Care Costs
A significant healthcare event can drain savings quickly. Consider long-term care insurance or hybrid policies that combine life insurance with long-term care benefits to help protect your assets.
This is one of the most important and often overlooked risks to a retirement plan. While long-term care insurance can be expensive, it’s essential to recognize that the cost of long-term care facilities far exceeds the premiums of most policies. Other approaches, such as self-insuring, hybrid life insurance policies, or annuities with long-term care riders, can also be considered.
No to beat a dead horse here but as with annuities, it’s crucial to understand the fine print and ensure the product fits your situation before making a commitment.
Retirement is a unique journey, and preparation is ideal to make it a fulfilling chapter of your life. The fear of outliving your savings is valid, but with careful planning, smart tools, and the right guidance, you can feel more confident about your financial future.
If you’re unsure where to begin, consider reaching out to a trusted financial advisor. At Medallion Financial Group, we’re here to help you develop a retirement strategy that aligns with your goals and helps to provide peace of mind for the years ahead.
Let’s start a conversation today—because retirement is too important to leave to chance.
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