Retirement is an exciting journey—it’s about freedom, choices and new experiences. Sure, you are ready to embark on this journey you have worked so hard to achieve. But you, like the millions of American Baby Boomers preparing for retirement, may have concerns about your financial security and how you are going to cover the expenses that come with this new journey. The reality, of course, is to do it in style—and that’s where an effective retirement income plan comes into play.
Nowadays, American Baby Boomers are expected to live longer, healthier, and more active lives than their predecessors. Given today’s economic realities and challenges, however, many future retirees will be unable to account for this longevity by relying solely on income derived from Social Security benefits and pensions. In fact, the National Academy of Social Insurance (NASI), in an October 2009 report , suggested that Social Security benefits and pensions will only cover 36% of a retiree’s income needs with the rest being the retiree’s responsibility from private savings. This is why it is essential to secure your financial future and build a retirement income plan.
Building and managing a retirement income plan is not easy—it requires deeper, more time intensive levels of research and analysis than is required when creating a savings plan. An effective plan will structure your assets in order to provide enough income to meet your desired consumption needs. The plan will also protect, grow, and stretch your asset base so you will not outlive your wealth. For most, this complex task, understandably, requires the guidance of a qualified and experienced financial planner.
Some of the risks that you and your financial planner will need to consider and evaluate when building your retirement income plan include:
- Asset Allocation: Retirees with portfolios overly concentrated in conservative investments, at current record-low rates, expose themselves to a greater risk of outliving their assets.
- Effect of Taxes: Tax rates for higher income tax payers are expected to increase, potentially eroding assets set aside for retirement.
- Health Care Costs: Rising health care costs coupled with inadequate health care coverage can have a devastating impact on a retirement income plan.
- Inflation: Inflation causes the dollar to be worth less tomorrow than today’s, thus increasing the future costs of goods and services, possibly eroding the value of assets set aside to meet those costs.
- Interest Rate Risk: Rising interest rates tend to reduce the earnings or market value of a bond portfolio (e.g. as rates rise, the price of a fixed rate bond will fall).
- Longevity Risk: Advances in modern day medicine and healthier lifestyles have led many retirees to underestimate their life expectancies, increasing the risks of outliving their assets.
- Withdrawal Rates: Aggressive withdrawal rates increase the likelihood that retirees will deplete their assets prematurely.
When addressing these risks, you and your financial planner should take a comprehensive approach and include diverse strategies such as growth, income, guaranteed income streams, and healthcare-related insurance products. Becoming proficient in these areas and managing their interplay takes time and involves a steep learning curve for the traditional financial planner. Therefore, confirm whether you financial planner is well versed in retirement planning and licensed to engage in the various strategies.
The good news is that with the right financial planner and appropriate mix of strategies and products, you can rest easy You and your planner will have the tools to draw the roadmap that will address the important questions, provide direction, and alleviate insecurity about the future. From there, it will be time to go to reap the fruits of your labor and embark on your new and exciting journey.