Important points
- Diverse retirement strategies should include various income sources, tax implications, and timelines.
- Be aware of often-missed risks like long-term care expenses, inflation, and potential tax reforms.
- Incorporate annual stress tests and adaptable income tools to ensure your plan remains viable during unforeseen events.
Having a retirement plan is one thing, but is it resilient enough for a crisis?
A recent Allianz survey revealed that while 62% of Americans worry about how future global or national issues could impact their retirement funds, only 46% actually consider those risks in their planning.
If your approach assumes steady markets and expected results, it might be wise to reassess and emphasize diversification, address overlooked risks, and include flexible options to cope with changes.
1. Start with three aspects of diversification
A resilient retirement strategy doesn’t hinge on just one type of investment or income source.
Carly Ransom, co-founder of Equal Path Investments, points out that the strongest strategies leverage three key forms of diversification: duration, tax treatment, and asset classes. She suggests a blend of fixed and variable income sources like Social Security, pensions, rental income, dividends, and bond ladders, allowing adaptation based on market conditions.
“Spreading out tax liabilities can mitigate issues stemming from unpredictable tax legislation,” Ransom noted.
This might involve balancing pre-tax, Roth, and taxable accounts now to sidestep potential higher tax rates later.
2. Consider risks that most people overlook
Your retirement plans may already address market fluctuations, but that’s not the whole picture.
“Clients often underestimate expenses related to healthcare and long-term care,” Ransom explained. “These can derail even well-funded retirement plans.”
Individuals reaching 65 have nearly a 70% chance of requiring long-term care at some point, and the costs can escalate quickly. In the U.S., the average annual fee for a private nursing home room is around $127,750.
“Not everyone prefers state-assisted care,” she added, emphasizing the necessity for long-term care options, whether through insurance or personal funding.
Ransom also highlighted longevity risks and unforeseen life circumstances, like job loss in your 50s or caregiving for elderly parents, as significant blind spots. Inflation and tax law modifications pose additional threats, particularly for those with concentrated portfolios.
3. Stay agile with flexible tools
While you can’t foresee the next crisis, preparation is key. To enhance your plan’s adaptability, Ransom recommends tools such as bond ladders, which are useful for covering essentials and tend to be less volatile than individual long-term bonds or fixed annuities. Additionally, she proposes looking into hybrid life insurance with a long-term care rider for more reliable funding when needed.
Ultimately, maintaining flexible choices is crucial.
Ransom remarked on the variety of beliefs among clients and advisors, saying, “Many resist stocks, pensions, long-term care insurance, or the idea of returning to work. Yet, diversifying your approach fosters more resilience.”
4. Review and stress test your plan regularly
Consider your retirement strategy as a dynamic document rather than a set-it-and-forget-it arrangement. Ransom advises conducting annual reviews that include stress-testing various scenarios, such as early retirement due to health issues, prolonged market downturns, and significant tax policy shifts.
If you’ve recently come into an inheritance or are contemplating early retirement, take time to evaluate your choices.
“A sum of $750,000 or even $1 million might seem substantial…but for many households, that’s not enough,” Ransom pointed out, especially for those lacking pensions or sizable Social Security benefits.
Instead of viewing retirement as a singular objective, she suggests clients consider gradual retirement or part-time employment to remain engaged and financially secure.
Quick explanation
According to Allianz, nearly half of Americans (47%) lack a written financial plan. So, even with savings for retirement, your assets might be vulnerable to significant risks, particularly if there are blind spots in your strategy.
Conclusion
Safeguarding your retirement from crises isn’t about anticipating disasters; it’s about ensuring durability. Diversify your income streams, incorporate flexibility into your exit strategy, and pay attention to risks like taxes, inflation, and long-term care. Though you can’t foresee every potential crisis, building a solid foundation allows you to weather most of them.
