A few weeks ago, Maeve and I headed to Hyannis to pick up her car from the dealership. It needed some normal maintenance at the dealership, so after work one evening we hit the road. While this might not be what I’d typically call a “road trip”, it pretty much felt like one due to the heavy summer congestion on Route 28. And while I’m always happy for some one-on-one time with my girls, after an hour or so in white-knuckled gridlock, well, we both had enough.
Then the best part? Once we finally made it there and I went to pay for the service, I made a very disappointing discovery – I had accidentally left my wallet at home. What a rookie mistake by me. We had come all this way, but this looked like it was going to change our plans for what should have been a quiet – and hopefully faster – trip home. Now luckily, the dealership took pity on us and allowed Jill to call in and pay for the service over the phone, so things worked out just fine.
But you know . . . this got me thinking.
I got thinking about the long journey so many of us make to retirement – and what can happen if you arrive, ready to pack up your office for good, only to have your retirement plans thwarted by an unexpected event. You see, folks, this is not as uncommon as you might think. I have seen it happen more than once, as a pre-retiree chooses their retirement date only to find themselves extending it – sometimes numerous times – because their finances are no longer sufficient to support the retirement they planned for.
There are a number of risks that can crop up in your later working years or early in retirement that could have a life-changing effect on you. So, this week with our time together, I’d like to dig deeper on a few of these, and some possible solutions to help mitigate these risks.
First up, market risk or a steep drop in the market. During your working years, the market went up and down frequently, and when you lost money, you had plenty of time for the market to rebound and make you whole again, or even better. But this all changes when you reach retirement and need those funds to start providing you with income. Taking withdrawals from an account that is declining fast and furious due to market loss is a sure way to deplete your portfolio much more quickly than you planned for.
Luckily, this is a risk that you can plan for well in advance. As you get closer to retirement, generally 5-10 years before, you need to consider a more appropriate investment strategy designed for distribution planning. Because you have less time to recover from heavy losses in the markets, now is a good time to revisit your risk-budget and begin to design and deploy a more appropriate distribution strategy.
A distribution strategy that should infuse quantitative data into the strategy to help mitigate loss. You see, a downside risk mitigation strategy should manage the downside first so the upside can take care of itself. Remember, your investment plan now has to produce income. A significant loss could severely impact your income plan.
Next, longevity risk or that you outlive your money. Unlike your parent’s generation and theirs before them, people today need to plan for as many as two to three decades in retirement. Look, a 65-year-old woman today has a life expectancy of almost 87 years₁. And if she makes it to age 70, it increases to almost 88 years, and this trend continues. And this is just the average. “The problem with the average is some people will live longer than that, and you want to be 100% sure that you are not going to outlive your money,” says Cindy Levering, a retired pension actuary in Baltimore and member of the Society of Actuaries committee on post-retirement needs and risks.
To help manage this risk, we recommend you plan for a long life, beyond what your estimated life expectancy average looks like. This might mean saving more money than you initially planned, purchasing a lifetime income product such as an annuity, or a combination of these strategies.
A third challenge to your retirement success is health-related expenses. Medical and other health care costs in retirement can be significant as our heath begins to deteriorate. Even the healthiest among us will likely see these costs increase in retirement. In fact, a study by Genworth estimates that seven out of every ten people will need long term care at some point in their lifetime₂. And the costs for health care are nothing to sneeze at – in 2020, the median cost for an assisted living facility was $4300 and the cost for a private room in a nursing home was $8821. For many people, these costs can quickly drain their portfolio if they don’t have a plan to cover them. There are a variety of ways to help pay for these expenses, including traditional long-term care, insurance products with added health care benefits, or self-funding the costs. Plan for this is now, while you still have the time – and ideally your health – to make the most appropriate decision for your situation.
Lastly, inflation rate risk or the risk of eroding the purchasing power of your dollars. This is a risk that doesn’t present itself all at once. Rather it slowly sneaks up on you, year after year. Here is one example of how it works – in 1913, a gallon of milk cost about 36 cents per gallon. One hundred years later, in 2013, a gallon of milk cost $3.53—nearly ten times higher. This increase is not due to milk becoming more scarce or more expensive to make. Instead, this price reflects the gradual decrease in the value of money as a result of inflation₃. To help manage this risk, it’s important that you have at least some assets in your portfolio that can grow and provide a hedge against the risk of having inflation deplete your assets too quickly.
Folks, arriving at retirement should be a time of joy, not a time to worry about the unexpected. Make the journey count by preparing ahead for these unknowns.
And as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.
This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Market data and other cited or linked-to content in this article is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A and applicable Form ADV 2Bs. Please contact us to request a free copy via .pdf or hardcopy. Insurance instruments offered through CutterInsure, Inc. 1. https://tinyurl.com/yn2s7xj5 2. https://tinyurl.com/53k36aa8 3. https://tinyurl.com/arpjncr7
