I hope that you enjoyed the series on the steps to retirement planning so far.
In this installment we will deal with Step 5:
STEP 5 – Manage or Eliminate Retirement Risk
We want to make sure the right kinds and amounts of insurance and risk management strategies are in place to effectively deal with the most sinister of retirement risks which could derail our plan.
This includes the premature death of a spouse, unexpected long-term care costs, and a major market meltdown during retirement while you’re taking money out for income.
PREMATURE DEATH OF A SPOUSE
Besides the emotional loss of a spouse, there can also be financial ramifications. The surviving spouse will need to live on just a single Social Security benefit rather than two.
Also, a surviving spouse may have a reduction in pension income depending on the way that the deceased spouse elected their payments.
Some of the reduced income may be offset by the reduction in expenses for a single individual rather than a couple, but testing should be done to determine whether or not there is a sufficient amount of income and assets for the surviving spouse.
LONG TERM CARE COSTS
Depending on the studies that I read, healthy 65-year-old’s have a 60% – 70% chance of needing some form of long-term care before they die. If you are a couple, you’ll need to multiply those chances by two.
Although the cost of long-term care can vary dramatically by the level needed, skilled nursing care in the state of California can cost up to $7,000 per month. This amount can go up to $10,000 per month in the memory wing.
These costs can easily scramble a nest egg.
Fortunately there are alternatives to funding long-term care costs besides traditional long-term care insurance.
Some of these alternatives include long-term care writers inside of life insurance policies and the use of a Home Equity Conversion Mortgage as a safety net.
What matters most is that careful thought has been given to how these costs will be funded whether traditional insurance is used or not.
SEQUENCE OF RETURN RISK
A major risk that is not well understood by retirees is the sequence of return risk.
During the accumulation phase of life, the sequence of investment returns has no impact on the final account balance.
This changes during the distribution phase of life where the sequence of investment returns has a critical impact on the longevity of investment assets since simultaneous distributions from the account do not allow a full recovery of the money lost during the market downturn.
This makes managing investment risk critical.
The optimum strategy is to reduce or eliminate the sequence of return risk by creating predictable or guaranteed income for the core retirement expenses. This can be done through tactical investment management or by shifting the risk for the ongoing income from an investment company to an insurance company.
The previous three risks are not all-inclusive, but provide three important ones to consider when building your retirement blueprint.
If you have any questions about reducing risk during retirement, please contact me.