4 common retirement risks (and possible solutions)

To cover the potential costs of long-term care, set up a plan well in advance of needing care.  Long-term care planning does not simply involve the decision as to whether or not to buy long-term care insurance. It requires a discussion with family and friends about the type of care that is desired, where care should be delivered, and how care will be paid for. Long-term care expenses can be paid for out-of-pocket, through the purchase of a long-term care insurance contract, through government programs (Medicaid), or through other hybrid financial service products that combine the benefits of life insurance or an annuity with long-term care insurance. Another option is to pre-pay some of these costs by moving into a continued care retirement community (CCRC).

"Sequence of Returns"

Another major retirement risk known as "Sequence of Returns" (SoR) risk presents a unique challenge because it first rears its ugly head early in retirement when assets need to be sold to create income. Investment returns are unpredictable, and negative returns in the early years of retirement can increase the likelihood that one will eventually run out of money.

SoR risk is tied in part to the volatility of the investment portfolio. One way to reduce SoR risk is to reduce this volatility, especially in the first few years of retirement. Maintaining a higher allocation of bonds than stocks in the few years leading up to and immediately following retirement is one approach. Another strategy is to establish an income source that is independent of the investment portfolio, like a term certain annuity which provides a set amount of income. Another solution is to leverage home equity to help fund the early years of retirement if the market is down. A HECM line of credit allows the homeowner access to his home equity and is available as early as age 62. This allows the homeowner to preserve investment assets for later periods when the market rebounds, while maintaining sufficient income during early retirement.

Public Policy

Another risk that can have a huge impact on retirees is public policy risk. Retirees experience a sense of helplessness when the Government decides to raise taxes, cut benefits, or modify Social Security and Medicare. Minimize this risk by diversifying the retirement savings and try to reduce reliance on a single source of retirement income. Such steps can minimize the impact that any one public policy change will have. Lastly, remain attuned to the ever-changing retirement income planning landscape, as programs like Social Security and Medicare are sure to evolve and change over the next 30 years.

While these risks present challenges, staying up to date with the best strategies to manage retirement risks is a way to turn these potential roadblocks into minor speed bumps. Comprehensive planning which includes building safeguards into a retirement income plan to protect against risk is the best route to a financially secure retirement.