What Risks Should Your Retirement Plan Prepare For?
Ask someone how they feel about risk, and they might picture jumping out of an airplane. Kristen would probably tell you that is not for her. She did let me talk her into parasailing once, but I do not expect a repeat trip.
The risks we can picture tend to get our attention. Gradual risks are easier to overlook.
I see that in retirement planning. People often ask what will happen if the stock market drops. It is a good question, but it is only one part of the conversation.
What are the biggest risks to consider in retirement?
Market risk. Investments can lose value, sometimes right when you need to withdraw money. Your plan should show how much market movement you can reasonably live with and how you would fund expenses during a decline. FINRA notes that a major stock decline near retirement can force someone with substantial stock exposure to reconsider their plans.
Inflation risk. The cost of groceries, insurance, travel, and home repairs may rise over time. When you leave work, you also leave behind the possibility of raises and bonuses from that job. Social Security has cost-of-living adjustments intended to help preserve the purchasing power of benefits, but your full retirement budget may grow differently.
Tax risk. What you have saved and what you can spend are not always the same number. Withdrawals from different accounts can have different tax consequences. Consider taxes when deciding where your retirement income will come from.
Healthcare risk. Medical needs and related costs can change throughout retirement. A plan should leave room to revisit those assumptions as your circumstances change.
Longevity risk. Living a long life is something to hope for. Financially, it means your income may need to support you for longer than you first expected.
Can one written plan address all of them?
A useful retirement plan should show how these risks interact. If prices rise, you may need more income. If you need more income during a market decline, your withdrawal choices matter. Taxes can affect how much of each withdrawal you get to keep.
That is why I do not think a single account balance tells you whether you are ready to retire. I want to see how your income, spending, investments, and possible changes fit together on paper. Then you can revisit the plan as life changes.
If you would like another perspective on the risks in your retirement plan, our team is available atLegacyRetirementGroup.com.