If nothing else, the last few years have demonstrated just how unpredictable life can get. So, when it comes to planning for retirement—which might be years or even decades in the future—the risks and uncertainties can feel overwhelming. Interestingly, even though everyone’s situation is unique, most of us share the same four concerns:
- What if the stock market crashes?
- What if I outlive my money?
- What if inflation eats up my resources?
- What if I have huge medical or long-term care expenses?
These are tough questions for sure, but the good news is that once we ask them, we can take positive steps to prepare.
Protect yourself from stock market declines
If you're a regular Ask Carrie reader, you know I'm a firm believer in the power of the stock market to build long-term wealth. But along the way, we should also expect and plan for inevitable downturns.
When these dips occur close to or in retirement, they can be especially painful, not only because we likely have more money at stake than we had when we were younger, but also because we have less time to make back what we lose in a downturn.
The best defense? Make sure your portfolio's asset allocation matches your willingness and ability to take on market risk. If you do this at the outset, that's great—but then be sure to adjust your risk exposure by rebalancing your portfolio on a regular basis. You should also consider doing so when either market conditions or your personal circumstances change. To be clear, this does not mean chasing returns or attempting to time the market.
As a general guideline, it can be wise to gradually decrease your allocation to equities while you increase your holdings of fixed income as you age. Money you will need in the next two to three years shouldn't be invested in stocks. Keep it in a safe, liquid checking or savings account or otherwise invested in safe assets that can be easily converted into cash. That way, if the market tanks, you won't be forced to sell and seal your loss. That said, keeping at least some stocks in your portfolio, even in late retirement, can help extend the life of your savings by delivering opportunities for growth and higher returns over time.
Plan for a long life
The good news is that with life expectancies increasing, your retirement might last for 30 or even 40 years. Of course, to make the most of those years, you’ll have to have that much larger of a nest egg.
You can start to plan for what financial planners call "longevity risk"—that is, the risk that comes from living an unexpectedly long life—not only by holding onto some equities and saving more, but also by delaying filing for Social Security until you qualify for your maximum benefit (age 70 for wage earners, or “full retirement age” for spousal benefits).
Other strategies can include buying an annuity to guarantee income for life, being prudent with your retirement budget, downsizing to a less expensive home, and perhaps even taking out a reverse mortgage to tap into your home’s equity. As an investor, it's also essential to minimize fees, which can easily erode your portfolio.
Don't become a victim of inflation
Easily overlooked but potentially devastating in its impact, inflation is often referred to as the silent killer. To illustrate, just a 3% rate of inflation will cut your purchasing power by 26% after 10 years and 45% after 20 years. Put another way, with 3% annual inflation, $1 million will have the purchasing power of about $560,000 in 20 years—or less if inflation is higher.
Clearly this is serious for a retiree, or for anyone living on a fixed income—so it's essential that we all build inflation into our financial plans. You can think of it as a balancing act: Yes, we need to protect ourselves against market risk by keeping our shorter-term money liquid and safe, but we also need enough stock market exposure to combat inflation in retirement. In addition, fixed income funds can reinvest in securities offering higher yields as interest rates rise to counter inflation. Investors can also look to Treasury Inflation-Protected Securities (TIPS), or Series I Savings Bonds, as well as real estate and commodities.
In terms of everyday money management, it’s generally smart to pay off credit card debt as well as other types of variable rate debt that can become more expensive with time. During periods of high inflation, it's even more important to become a vigilant comparison shopper, seeking out less expensive alternatives for goods and services, taking advantage of sales and discounts, and perhaps even paying in cash for high-ticket items such as an appliance or car instead of financing.
Prepare for increasing medical and long-term care expenses
It's an unfortunate fact of life that our medical needs tend to increase as we age. Compounding this, the cost of medical and long-term care has increased even more than the general rate of inflation. According to a 2020 estimate from EBRI, the average married couple aged 65 would need approximately $168,000-$325,000 to cover medical expenses in retirement—not including long term care expenses. According to Genworth, the average cost of a nursing home private room in 2020 was almost $106,000, with home care averaging almost $55,000 per year.
Many medical conditions are unavoidable, and I would be remiss if I didn't mention the importance of maintaining an active and healthy lifestyle. But issues still arise for all of us, so make sure you have good health insurance and never scrimp on routine or immediate care. It's also essential to have a plan for long-term care whether or not that includes long-term care insurance.
You can also give yourself a head start by contributing the maximum every year to a health savings account (HSA) if you are eligible. These accounts allow you to save and invest tax-free for future health costs. And before you reach 65, take your time to evaluate the best Medicare options.
Retire on your terms
After decades of hard work, retirement can be a fulfilling new chapter in your life – but it requires sound preparation. A financial planner can be a great partner as you explore different strategies. By taking the time to address the risks now, you’ll be in the best position to eventually enjoy the rewards of a well-planned retirement.
Have a personal finance question? Email us at email@example.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.