Creating a plan for your financial future has never been more important. Retirements are longer, markets can be volatile and surprise costs can drain your savings.
Life happens, even in retirement, and it can be a challenge to be as prepared as possible. A retirement planning strategy can help you deal with new risks and protect your future, so that you feel more confident navigating the journey ahead.
Here are five significant risks facing retirement today that you should be aware of:
People are living longer than ever before. Consider this: for an average 65-year-old couple, there's a 50 percent chance that one partner will live to age 92.1 If you don't plan for living longer, you may outlive your retirement savings and face an unexpected income gap. Most older adults only have $95,0002 in retirement savings, yet the average annual expenditures for Americans 65 and over is almost $45,000.3 Outlive your money by 5 years and that gap can balloon to $225,000.
2. Rising healthcare costs
Medical expenses are one of the biggest risks to your retirement income. Older adults can expect to pay about $404,253 in lifetime healthcare costs.4 Because Medicare only covers part of those fees, many retirees face a significant coverage gap. And if you're living with or develop a chronic illness, costs rise dramatically. Protective Life created a video on Rising Healthcare Costs to explain how your medical expenses rise as you age and explores the importance of covering unanticipated out-of-pocket healthcare costs.
3. Rising interest rates
Bonds are often thought of as a “safe” asset by retirees. However, it's important to note that as interest rates rise, the market values of existing bonds will fall as new bonds with higher interest rates are issued. This scenario could pose a problem for a retiree if he or she needed to liquidate a bond for emergency funds.
4. Sequence of returns
A market drop that occurs early in a person's retirement can also lead to a drain on their retirement savings sooner than expected. Most retirees rely on portfolio withdrawals for income. If your money can't last as long, it could be the result of “poor sequence of returns.” A financial advisor can work with you to explain the “sequence of returns” concept and help you account for market volatility in your retirement planning strategy.
5. An unpredictable disrupter
The stock market has seen its share of volatility over the past decade. There's simply no way to predict when a steep drop will hit your portfolio. And most people cannot afford a big drop.
An unforeseen event like the Great Recession of 2008-2009 can also send your asset values plummeting. Although the market eventually rebounded, pre-retirees hit with a 40% loss during the recession needed five years to get back to pre-crash levels, according to data provided by Morningstar and calculated by Protective Life Insurance Company.5 The recession forced many investors to adjust their retirement plans.
Protect your retirement from uncertainty
It's stressful to think about the rising costs and uncertainties of getting older in today's market. Talk to your financial advisor to create a plan for these events. A knowledgeable professional can advise you on investment options, such as annuities, that can offer guaranteed income opportunities. When you plan for the challenges ahead, you may be better able to gain peace of mind to be happy, confident and financially secure long into your retirement.
1. Annuity 2012 Mortality Tables © 2017 Morningstar. (All Rights Reserved).
2. Economic Policy Institute analysis of Survey of Consumer Finance data, 2013
3. Bureau of Labor Statistics, Consumer Expenditure Survey, 2015.
4. HealthView Services: 2017 Retirement Health Care Costs Data Report
5. Calculated by Protective Life Insurance Company using S&P 500 market capitalization information and data provided by Morningstar.