Linda P. EricksonLinda P. Erickson, CFP®, is the president of Erickson Advisors and a registered principal offering securities through Cetera Advisor Networks, LLC, 336-274-9403 lindae@ericksonadvisors.net.
When someone asks if you have any risk to your retirement savings, how do you answer?
Many will say, “I don’t have any risk. I have everything in an investment or savings account that is guaranteed.” While it may seem that having a guarantee from a financial institution you trust to make good on that guarantee would mean you have no risk, I need to suggest there is a potential hidden risk in all retirement portfolios.
In brief, the hidden risk is outliving your assets. The professionals refer to this as “Longevity Risk.” Not too long ago, when the Baby Boomer generation was just advancing to or through middle school, 14 percent of 65-year-olds could expect to live to age 90. Fast forward to the turn of this century, 2000, and that expectation jumps to 26 percent, and by the middle of this century we should expect almost half of 65-year-olds to reach age 90. (“Financial Gerontology,” the Journal of Financial Services Professionals, November 2012)
How long will your assets continue to give you the income you expect, the income you need in retirement? If you don’t know the answer to this question, you should. You may have a risk that could be far more devastating than the risks you ordinarily think of, such as market risk or interest rate risk. Of course, if you have a pension, that income will continue until your death. Social Security income will continue as well. Please imagine for a moment, however, what your lifestyle would be like with only those one or two income sources.
Portfolios need to be evaluated for this Longevity Risk, and this evaluation needs to be run using various assumed rates of return or interest rate assumptions and inflation assumptions. The results of this analysis may surprise you, may even unnerve you.
A Longevity Risk analysis may prompt you to alter your spending patterns now to avoid spending to zero too soon. On the other hand, this analysis may prove to you that your asset base will likely deliver the income you need, and leave the legacy you want to your children and grandchildren.
It is important, in all cases, for your analysis to look at or beyond age 90. Most financial services professionals have the tools to assist in this analysis and the application of the analysis to your uniquely personal situation. If you prefer to tackle this analysis yourself, there are any number of calculation tools available on-line, through professionals’ websites, and mutual fund and 401(k) sponsor websites.
Whether you prefer to work with a financial coach or do it yourself, make a New Year’s resolution to know your “Hidden Risk” and to take whatever action may be necessary to be a good steward of your personal financial risk management.