8 Biggest Risks We Face in Retirement

We all face many risks to our financial well-being as we retire. Below are eight of the most common risks retirees face and some brief solutions to think about.

A Long Life. Life expectancy tables prove out that if you have already made it to age 65, there’s a 50/50 chance you’ll live well into your 80’s (or later). Plan to live a long life and prepare accordingly. This is especially true if there are two of you.

Health Concerns. As we all know, with age comes health problems. Over time, this can take up a larger percentage of our income, often times culminating in facilitated care, either at home or in a senior facility. Prepare for this when you are young (50s and 60s), look for good supplemental health coverage and consider long-term care insurance. But above all else, know that aging and deteriorating health is inevitable and you need to plan for it.

Inflation. With a rate of inflation around the historic norm of 3%, you’ll lose half your purchasing power within 20 years if you don’t take steps to offset it. Make sure your investments will appreciate and exceed inflation over time. Assets like stocks, bonds, and commodities should be a healthy part of every portfolio. Hold enough cash for short-term needs (2-3 years worth) and to cover unexpected events, but much more is unnecessary and simply loses value over time.

The Market. As with the risk of inflation, there is the risk of the market going haywire for periods of time. Spread your investments among various asset classes to cushion the blow. Stocks, bonds, commodities, real estate, and cash should be your primary asset classes. But within those asset classes, you should also spread thing around. For example, “stocks” should include domestic, international, emerging markets, and both small and large companies.

Interest Rates. Relying on the interest from CD’s can be a fruitless effort. Sure, there was a day when CD’s were paying double-digit rates – 30 years ago. Those days are long gone, and for the foreseeable future, shot-term interest rates will not be enough to support you throughout retirement.

Making Withdrawals when Markets are Down. Holding 2-3 years’ worth of living expenses in cash helps avoid being forced to sell your stocks when markets have dropped. Draw from this account when markets are down and sell more of your stocks when markets are up.

Poor Financial Decisions. Being wildly speculative or extremely conservative with your investments. Overextending yourself with home renovations or that 2^nd home you always wanted. Fancy new cars. Do yourself a favor and run major financial decisions past a professional. It helps to pay a few bucks for a fee-only financial planner to give you their opinion on your asset allocation and spending decisions. Avoiding a major financial blunder will pay you back many times over the cost of some good advice.

Taxes. Poor tax planning can leave you with a hefty tax bill. In addition, there's always the potential of changes to the tax brackets the tax code. Find a good tax adviser who understands tax implications and can help you plan the right moves now in order to minimize taxes each year.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.