Joey K. from Gilroy, CA asks: Hello Mitch, my question is a simple one: what would you say is the biggest risk facing retirees today? Thanks in advance for your response.
Mitch’s Reply:
That’s a great question, thanks for asking! The most obvious candidates for the biggest risk are bear markets and/or downside volatility, but over the course of someone’s retirement, I do not believe that should be the biggest concern. Markets endure cycles, and there are ups and downs. A retiree’s asset allocation and long-term return target should take these downturns into account. The biggest market risk I see is not a bear market, but the investor who makes knee-jerk reactions to sell-offs and alters their asset allocation and retirement plan in the process. Investment mistakes in volatile markets can be challenging to recover from.1
But market risk aside, I think the biggest risk retirees face is underestimating their cash flow needs throughout retirement, which includes underestimating how long they will live and how much they will potentially spend on healthcare.
8 Ways to Keep Your Retirement on Track!
There are many changes and unknowns, such as market volatility and bear markets, that can affect your retirement portfolio.
Especially for those who are planning for retirement – we recommend that you find a strategy that better protects your investments and helps to avoid common mistakes. To learn how to avoid common mistakes that many investors make, we recommend downloading our guide, “8 Retirement Mistakes You Need to Avoid.”2
If you have $500,000 or more to invest, learn more by clicking on the link above.
According to the Social Security Administration, a man turning 65 in 2022 can expect to live another 20 years, and a woman turning 65 this year is expected to live even longer – 22 years. When we establish investment and retirement income plans for our clients, we run cash flow analyses under various market scenarios to see how the portfolio is affected by different levels of withdrawals, as well as different inflation rates. We also stress to clients to be conservative about life expectancy – planning to live to age 100 is better than just planning the next 15 years. This process allows us to ‘stress test’ the portfolio.
Another risk that retirees do not think enough about, in my view, is the cost of healthcare in retirement. According to the Fidelity Retiree Health Care Cost Estimate, people age 65 in 2022 should expect to spend about $315,000 in after-tax dollars for health care costs in retirement. These costs include out-of-pocket expenses not covered by insurance, like prescription drugs or long-term care. Healthcare inflation is historically higher than broad-based inflation, so these costs tend to rise at a faster pace than the cost of other items, like food and housing. $315,000 is not a small amount of money, and it often drives the conversation about needing growth in an investment portfolio over time to keep up with rising costs.
These two primary risks – longevity and rising costs of healthcare – can be baked into a financial plan by running analyses to see how both would affect cash flows and portfolio values over time. If we add inflation and ever-changing market cycles into the analysis, we can gain a clear picture not only of what asset allocation is needed to help meet a retiree’s goals, but also what level of cash flows are appropriate to ensure the portfolio does not deplete over time.
Lastly, there are some common mistakes that we have seen investors make with their retirement portfolios that can be avoided. We recommend reading our guide, “8 Retirement Mistakes to Avoid”3, to give you more insight into how to avoid these mistakes. This guide dives deeper into the following:
- Trying to Time Markets
- Lack of a Diversified Portfolio
- Mutual Fund Investors Underperforming Markets
If you have $500,000 or more to invest, claim your copy of our guide, 8 Retirement Mistakes You Need to Avoid,3 by clicking on the link below.
Disclosure
1 CNBC. August 5, 2022. https://www.cnbc.com/2022/08/05/retirees-may-be-focusing-on-wrong-risks-to-their-financial-security.html
2 ZIM may amend or rescind the free guide “8 of the biggest retirement mistakes investors should avoid” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the free guide “8 of the biggest retirement mistakes investors should avoid” for any reason and at ZIM’s discretion.
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
Questions posed are for demonstrative and informational purposes only and may not reflect the views of current clients or any one individual.