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Managing your money in retirement comes with its unique set of challenges. When retired, the goal of investing isn't about growth; it's about the balance of preservation, depleting capital, and careful distribution of your life savings. Understanding the main risks associated with investing in retirement is crucial for navigating some big and specific risks successfully. Here, I delve into five significant risks: inflation, sequence of return risk, investor behaviour, running out of money early, and the possibility of dying with millions left unspent.
Inflation: The Silent Retirement Threat
Inflation is often referred to as the silent killer of retirement savings. It erodes purchasing power over time, meaning you may find your income insufficient to cover expenses in later years. When looking at inflation rates over the last number of decades you may see the price of things double around every 20 - 25 years.
Strategies to mitigate inflation risk include investing in assets with the potential for inflation-beating returns, such as global equities. Diversifying income sources can also help, including rental income, annuities, and other investments that can offer growth potential or income that adjusts with inflation.
Sequence of Return Risk: Timing is Everything
The sequence of return risk refers to the danger that the market will perform poorly just as retirees begin to withdraw funds from their investments, significantly affecting the longevity of their retirement savings. For instance, a market downturn at the start of retirement can deplete savings more quickly than if it occurs later, as initial losses are compounded by withdrawals.
This risk underscores the importance of a well-thought-out withdrawal strategy and a diversified portfolio. Strategies such as maintaining a cash reserve of around 2 years of total expenditure can provide a buffer against this risk, allowing riskier investments time to recover without necessitating withdrawals.
Investor Behaviour: The Human Element
Investor behaviour can significantly impact retirement outcomes. Emotional decision-making, such as panic selling during market downturns or chasing high returns, can derail a well-planned retirement strategy. A Vanguard study suggests that investors who adhere to a long-term plan and resist the urge to react to short-term market volatility tend to achieve better outcomes.
Education and discipline are key to mitigating this risk. Working with a financial advisor can help maintain a level-headed approach to investing in retirement.
Running Out of Money Early: A Real Concern
The fear of running out of money is perhaps the most palpable among retirees. This risk is exacerbated by increasing life expectancies. Longevity data shows that a 65-year-old today has about a one in four chance of living past 90. This longevity risk necessitates careful planning to ensure that retirement savings last for potentially 25-30 years or more.
A strategic approach involves calculating a sustainable withdrawal rate, considering various income sources (State pension, private pensions, savings, etc.), and adjusting spending patterns to align with the longevity of the savings.
Dying With Millions Left: An Overlooked Risk
Conversely, the risk of dying with a substantial amount of money left unspent may not seem like a problem, but it indicates a missed opportunity for a more comfortable or fulfilling retirement. This scenario often results from overly conservative spending or investment strategies.
Proper estate planning and considering a more aggressive withdrawal strategy (within reason) can ensure that retirees fully enjoy their savings while also planning for any legacy or charitable giving they wish to leave behind.
Conclusion
Investing in retirement is fraught with unique challenges, but understanding and planning for these risks can lead to a more secure and enjoyable retirement. Strategies such as inflation protection, careful withdrawal planning, disciplined investing behaviour, and comprehensive financial planning are vital. With the right approach, retirees can navigate these risks successfully, ensuring their retirement years are golden in more ways than one.
If you would like to talk through your retirement income questions then please book in a time for us to have a chat
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