Even though markets have historically gained over time, they do move
up and down. If there’s a significant market drop shortly before or
early in your retirement—just as you’re starting to tap into your
assets—the value of your investments could shrink to an extent that
brings long-term consequences. Even if the market subsequently
improves, “if the first four or five years of your retirement are bad,
it can be difficult to recover,” Vrdoljak says.
What You Can Do:
Take a second look at the way you invest. As you near
retirement, shifting to a more conservative investment approach may
help protect against market downturns. At the same time, it’s
important to maintain some exposure to stocks—a portfolio consisting
only of cash, CDs and bonds may lose ground to inflation over time.
(see Risk #3 below.) To find a suitable balance, Vrdoljak notes,
"a moderately conservative asset allocation may help reduce your
risk of outliving your money."
Draw down your assets thoughtfully. Speak with your advisor
about developing a withdrawal program that takes into account personal
factors such as your age, risk tolerance and liquidity needs. The
percentage of assets you can safely draw down each year—the way you
build your retirement paycheck—might change as you age.
Although quite low in recent years, inflation—even a modest
percentage—reduces your spending power over time. People in retirement
are especially vulnerable. Over a 10-year period, a relatively low
inflation rate of 2% can bring the value of every $100,000 saved down
to $82,035, according to estimates made using the Bankrate.com
inflation calculator. And over a 25-year period—probably a reasonable
expectation for the length of your retirement—that number falls to $60,953.
What You Can Do:
Consider investments that could grow along
with inflation. “That might be real estate or shares of stocks,”
Vrdoljak says. If you have bond holdings, you may want to consider
adding some Treasury Inflation-Protected Securities (TIPS). These
government bonds offer returns that vary with the inflation rate. “If
inflation accelerates for whatever reason, you get compensated for
that,” she notes. “You need to take care of yourself in a sustainable
way. If you don’t, then you risk not being able to care and provide
for loved ones in the way you’d like over the long term.”