Managing 7 Retirement Income Risks Today and Tomorrow
How can you help keep your plans on track?
When it comes to your retirement income plans, market volatility and its impact on your savings are probably, and understandably, at the top of your mind. However, there are also other risks for you to address. Here are seven you should be thinking about now and in the future.
1. Market volatility
In your retirement income planning, consider the effect volatile markets could have on your assets. You may be in retirement for 20 or 30 years, and the markets will likely fluctuate dramatically during that time.
To help manage your investments’ ups and downs, diversify your portfolio. Combining stocks with bonds, cash, and other types of investments can help you manage your level of risk.
Also remember to review your investments regularly in retirement to see if you need to make adjustments. For example, when you retire, you may still have a significant portion of your investments in stocks, but as time passes, you might want to increase the amount you have in bonds for their price stability and income potential.
Investing involves risk including the possible loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market. Investing in stocks involves risk, and their returns and risk levels can vary depending on prevailing market and economic conditions. Investments in fixed-income securities are subject to market, interest rate, credit and other risks. All fixed income investments may be worth less than their original cost upon redemption or maturity.
2. Required minimum distributions
Previously, the IRS required most individuals to begin taking withdrawals from their traditional IRAs and employer-sponsored qualified retirement plans (QRPs), such as 401(k) and 403(b) plans, starting at age 70½. However, the SECURE Act raised the starting age for these required minimum distributions (RMDs) to 72. This means you may have until April 1 of the year following the year you turn age 72 to take your first RMD. Keep in mind this does not affect individuals who turned 70½ on or before December 31, 2019.
In addition, the CARES Act waives 2020 RMDs from:
- IRAs, including inherited IRAs, and 2019 distributions taken in 2020, which had a required beginning date of April 1, 2020
- Certain defined contribution plans, including 401(k), 403(b), 457(b), and IRA-based plans
These changes provide additional time for individuals to potentially amass tax-deferred gains.
3. Retirement plan loans
The CARES Act also temporarily broadens QRP loan provisions. While these changes may make it easier for you to take a loan from a QRP, keep in mind that borrowing can make it more difficult to reach your retirement income goals, so be sure to give it careful consideration before you act.
4. Health care/unexpected expenses
Retirement income planning should address an array of potentially changing needs, including contingency funding for unexpected expenses, such as health care issues, long-term care, and additional family support. Insurance is available to help address these concerns. In addition, consider keeping an emergency fund with enough to cover 3-6 months of household expenses in low-risk, cash alternatives (bank savings accounts or certificates of deposit, for example).
5. Withdrawal strategy
Retirement income planning should address potentially changing needs.
An essential part of retirement income planning is determining an appropriate withdrawal strategy, which can play a critical role in determining how long your assets will last. A traditional rule of thumb had been to consider withdrawing 4% of your investments’ value each year in retirement. Financial professionals now believe a flexible approach to spending and withdrawals that’s tied to stock market and other conditions may be your best bet for retirement income—especially when there’s market volatility. Consider reducing your spending in retirement and, as a result, portfolio withdrawals when there’s a market downturn.
It’s important to develop a retirement income strategy to help outpace inflation.
Even relatively low inflation may erode your savings’ purchasing power over time and affect your lifestyle. The longer you spend in retirement, the greater its potential effect.
It’s important to develop a retirement income strategy to help outpace inflation, and that may mean holding an allocation to stocks for their growth potential. However, you’ll also need to keep your risk tolerance in mind.
7. Outliving your assets
While none of us can predict how long we’ll live, it’s helpful to know that, on average, an American at age 65 will spend approximately 20 years in retirement.* In fact, some will spend more time in retirement than they spent working.
As you do your retirement income planning, consider your family history and personal health. How old did your parents and grandparents live to be? Are you taking good care of yourself? If you think you’ll live to a ripe old age, you’ll need to employ strategies to help ensure your assets last as long as you do.
- Use market volatility as a reminder to revisit your asset allocation to make sure you’re properly diversified.
- Consider taking advantage of opportunities to avoid taking RMDs.
- Think twice before borrowing from your QRP.
- Anticipate your health care costs and prepare to deal with unexpected events.
- Develop a strategy for adjusting your retirement withdrawals to address market performance and other factors.
- Keep track of inflation and your life expectancy as they change over time.
* Social Security Administration, ssa.gov.