Risk. It’s more than just a game. It is a part of our lives.
We have been hearing a lot about different types of risks the last little while.
Along with health risks, weather risks, driving risks we have retirement risks.
What are retirement risks and how many are there? Well, it all depends who you ask, but to me there are seven. And the seventh one can be rolled all up and affect all of the other ones.
Are you excited to hear?
Number One is Inflation Risk. Do you know what inflation is? Think back 15 years or so when you could buy a loaf of bread for $1.00. Now you’re luck to get a loaf for less than $1.75. That’s inflation. Inflation risk can have a dramatic effect on your purchasing power over time. We have been told that inflation could get bad. Why? With all the money being printed and our money supply growing, there will be more out there, and when there is more of something it becomes less valuable. Milton Friedman, winner of the 1976 Nobel Prize in Economics, said that “Inflation is always and everywhere a monetary phenomenon”. Basically, and according to his 1956 paper titled “Studies in the Quantity Theory of Money”, it means that in the long run, increased monetary growth increases prices but does not really affect output.
What does this mean? The more money in the system, the more increases in prices we will see.
Inflation is risk number one.
Risk number two in retirement is Deflation. Deflation is when the general price levels in a country are falling, as opposed to inflation when prices rise. If this occurs, many times people will choose to hold on to savings instead of spending it, since prices will be lower tomorrow. Controlled deflation in and above itself isn’t really that bad of a thing, unless it is a staggering drop of 20%. That being said, could the drop in value of your home by 20% cause a problem if it is your main retirement asset? If real estate prices go down next week, will people wait until the following week to unlock their savings to buy a home?
Retirement risk number three is Market Risk. Now, there is a difference between market risk and market volatility. We have seen market volatility the last little while. Market risk has a lot to do with emotions. The average investor over time gets less than half the return of the index because they buy and sell at the wrong times. This is easily identified as Psychenomics.
During the great depression, the market bottomed on June 1, 1932. If an investor (put $10 000 in September 1929) sold out that day they would have realized a 78% loss. If they did nothing they would have recovered fully in 4 years and 4 months. If they had bought an additional $10 000 investment they would have recovered in two months. The one year return from the bottom was 163%.
How do you beat market risk? Manage it, put a floor under it or eliminate it.
Risk number four is Order of Return Risk. Most investors think average returns matter. Why? Because their entire lives they have been savers and investors.
The day you retire and start taking money out of a portfolio all the rules change. Average returns will mean absolutely nothing.
The only thing that is important when you retire is the order (or sequence) of returns.
The older you are the more conservative you should invest. Baloney.
The most critical time with investing your money is the last 5-6 years of working or the first 5-6 years of retirement. This is when you do not want to lose any money.
Risk number five is Long Term Care Risk. The longer you live the more likely it is that you will need some form of long term care. As we age and as we get older, naturally, we will need long-term care.
Living a long life can be a huge challenge to your retirement plan and your family.
Long term care is very expensive
Who is most affected when you need long term care? Your Family. It may not be as easy as you think.
Risk number six is Taxation Risk. Death and taxes. The only things in life that are guaranteed! Most retirement plans that are available to us are tax-deferred plans. This means that someday, when we take the money out of them it will be taxed.
As you near retirement the taxes will cause a huge drag on your retirement.
Ask yourself the question, will taxes go up or down in retirement?
Try to stay tax diversified.
Risk number seven is Longevity Risk. The #1 Retirement Risk. Longevity Risk is a RISK MULTIPLIER
If you die at 68, most risks don’t matter, however if you live until 80, 85, 90 all the risks matter.
Average 65 year old male will live to 85
Average 65 year old female will live to 88
What do I always say about averages?
Life expectancy is simply a mid-point
What the above means is that half of the 65 year old men right now will live until they are 85 and half the 65 year old women women right now will live until they are 88.
Married people live longer than single people.
There is a 50/50 chance one spouse will live to 92.
There is a 25% chance one will live to 97
Are you prepared for all these risks? Give us a call or send us a quick email and we can set up a time to talk. While all this may seem daunting to you, we are experiences at minimizing these risks and creating plans.
At Wright Wealth we create infallible retirement income and protection plans so you can confidently spend your retirement years happy.