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The Big Five

The Big Five

| June 09, 2017

As young people, we grabbed tigers by the tail and we held the whole world in our hands.  It seemed that everything came easily and the sky was the limit.  Then, in the blink of an eye, many are faced with the fact that retirement is 20 or fewer years away.  We have worked hard and have been saving money but retirement is staring us down.  One of the best things you can invest in is the advice of a CFP® practitioner to help keep you on track toward your retirement years.  Once we get to retirement age, we have no way to do it over again. So, let's say we did well and we are on track, now what?  Now comes the new task of guarding against risks that can drain our retirement accounts.  In my professional opinion, these are the top five major risks we will fight against while in retirement.

Longevity - It use to be that people worked hard for 30-40 year and shortly after they retired, they died.  Now, just the opposite is happening.  People are now in retirement for 20-30 years, depending on when they retire.  In addition, people are just living longer than in any other time of our modern history.  Did you ever think that living too long was a risk?  It is when it comes to your retirement savings. What can we do to mitigate this risk?  You have probably heard of asset allocation.  We also need to know about product allocation. Product allocation is the need to couple different types of investments to provide fixed and variable income streams.  Using high income stocks, bonds, fixed annuities, variable annuities, social security, pensions (if you have one), withdrawals from your 401k and IRAs, and the mix of taxable and tax-free income planning.  The proper combination of these options may help you eliminate this risk of living too long. 

Market Timing -  At different times in the business cycle, people let emotions rule the moment.  If the markets are going up, everyone is piling in.  When we are in recession, everyone wants out.  There is nothing wrong in buying an investment in an up market, however, there is something wrong in selling into a recession.  A recession is the most opportune time to be buying, not selling.  If you and your adviser have done proper asset and product allocation you can exchange conservative investments for more growth oriented investments while the markets are falling to buy more shares at lower prices.  Conversely, you can exchange more growth oriented investment for more conservative investments when the markets are higher and climbing.  These two strategies help to ensure we are always buying low and selling high.  This may be stupid advice, except for the fact it works!  These strategies are not considered market timing.  When someone times the market, they get in and out of the markets at the wrong times because of the "hot" news of the day - the sky is falling, only to have the sky recover the next day. Those that take this approach of selling into strong weakness are in for a rude awakening and irreversible damage to their portfolios. Market timers usually sell low and buy high.  Doctor, it hurts when I do this, well, don't do that!  Take a page from the best investors of our time, Warren Buffet, Peter Lynch, or John Templeton, buy good investments and hold them for a long time.  

Health - Being healthy in retirement starts by doing healthy things while we are younger.  Exercising, eating a more plant based diet, thinking positively, actively managing our weight, and being relatively conservative in the activities we partake in.  However, none of these things guarantees us that we will be healthy at any time.  With hereditary issues or other unavoidable diseases, our lives can be challenging now or through retirement. These things can also place a big strain on your financial lives.  So how can we prepare for the potential of bad health in retirement? We take an inventory of insurance coverage like, our medical plans or Medicare/Medicare Supplements, long term nursing care plans, annuity contracts, and life insurance.  What you don't want to happen is that you become penny wise and pound foolish - not having coverage for different health needs because you think or someone told you it was expensive.  I mean that if our health declines and we are in an irreversible or terminal condition and medical bills are piling up, that we don't have the right kinds and amounts of insurance when we need them most.  Having these policies in place well before some bad health issue comes up, will allow our spouses to not have to live in poverty because we drained the retirement account to pay for medical bills and then died.  Or we needed nursing care and had to stay in the facility for years as we deplete our retirement account and leave nothing for our spouse to live on.  You get the picture. Planning and coordinating this part of your plan may be one of the most important thing you do, especially for your spouse.

Inflation - Some people are fearful of everything.  Risk is not in their vocabulary.  Without risk, there is no opportunity for gain or loss. Taking prudent risks; however, is a necessity while planning for our retirement.  Inflation has historically run between 3%-4% each year (except for the past 10 years).  If the cost of things is rising this fast, we must make our money work harder than that to have a fighting chance to not outlive our money in retirement.  Investing in financial instruments that can provide us a return more than 3%-4% is not only important, it is essential.  To put it into perspective, if we want to have the same standard of living we have now in 25 years, we would have to have an income that is twice as much as we have now with just 3% inflation over that time. Otherwise, we will have to spend our principal and drain our retirement faster than we may want to.  We won't have a chance to do this over so you may want to consider an investment plan to aggressively outpace the inflation rate while we are accumulating money for retirement.

Withdrawing Too Much - If you are within a few years of retirement, you may want to calculate what it is going to take each month to live on to pay your bills then start living like this so you can get used to what it will be like when you retire.  Not knowing may cause you to withdraw too much money too quickly for the first few years and put your retirement account into a death spiral.  Planning will help you mitigate this risk.  Strategically pulling money out at different times and out of different types of accounts (Roth IRA, Traditional IRA, cash, or starting social security retirement benefits) will help as well.  Consult a CFP® practitioner that can help you coordinate these efforts.

There you have it.  The "Big 5" risks to your retirement and remedies to help thwart them.  In the interest of time, there are other remedies to help.  Give us a call to discuss your options and what is right for you.  We can help you coordinate and plan for these risks to save your spouse from having to live a poorer lifestyle throughout the rest of her life.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Snow Financial Group, LLC is not affiliated with Kestra IS or Kestra AS.