Financial Planning after Retirement

Whether you are about to retire or have already done so, the need for financial planning remains critical. If you retire in your mid-60s, you can reasonably expect to live another 25 years. The challenge is to stretch your assets over a time period that may be half as long as your entire working career.

Preparing a plan to help avoid the five key risks to your retirement income can help your money last throughout your retirement.

1Overspending
Obviously the amount you spend has an enormous effect on whether your money will last throughout your retirement. A slightly higher rate of withdrawal can significantly decrease your years of retirement income. As a hypothetical example, a portfolio of $1 million with a 4% annual withdrawal rate could provide 6 more years of retirement income than a 5% withdrawal rate.

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Source: Fidelity Investments


2Not Planning for a Long Retirement
You may end up spending more years in retirement than the years you spent working. Your spending habits and investment strategy need to take this into consideration.

3Market Risk
Standard practice for retirees has been a conservative approach, investing primarily in bonds and CDs to avoid the volatility of the stock market. However, these conservative strategies can significantly reduce the opportunity for growth of your assets during your retirement years, and can eliminate the hedge against inflation that diversified stock portfolios offer.

4Inflation
Even a 3% inflation rate can have a large impact on purchasing power. For example, a retiree with roughly $72,000 of living expenses in 2005 would need nearly twice as much ($150,000) to meet expenses 25 years later. Furthermore some costs, like health care, may rise even faster than the general inflation rate.

5Health Care Expenses
A 2002 study estimates that a couple retiring today at age 65 without an employer-funded retirement health plan will need current savings of $160,000 to cover their expected health care. Moreover, roughly 50% of Americans will be admitted to a nursing home at some point in their lives, with half staying up to 2.4 years.