What You Can Do:
Think about delaying the age at which you claim Social Security. “By claiming at age 70 as opposed to 62, your monthly income could go up 76%,” Vrdoljak says.2 Though you sacrifice income early on, knowing you’ll have higher Social Security payments if you reach your eighties and nineties is like having “longevity insurance,” she adds.
Find out whether an annuity might be appropriate for you. Investing in a lifetime income annuity could help you avoid the risk of outliving your retirement savings by providing a path to income for as long as you live. For this reason, it can also offer protection against market risk (see Risk #2). Because annuities come with certain costs and risks, be sure to talk to your advisor about all the pros and cons before making a decision.
2. CHANGES IN MARKETS
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). 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.