When you think of risk you may think of the volatility of the stock market. You may remember the catastrophic impact of the stock market crashes in 2000-2002 and 2008. You spent years recovering losses. Positive performance helped you win back losses, but did not add material assets to your retirement nest egg.
However, there are even bigger risks that are not as obvious as a volatile stock market that you can read about on the Internet.
1. Retire on Time
There is a major risk you will not accumulate sufficient assets to retire when you want to. Tens of millions of Baby Boomers are coming to this stark realization. And, there is no short-term solution for accumulating more assets. You cannot save your way out of the problem. You need higher rates of return, but they require increased investment risk. The only easy solution is the deferment of your retirement date.
2. Run out of Income
Another risk is adequate income that will fund your standard of living during all of your retirement years. You have to take risk to accumulate assets during your working years so you will have adequate income during your retirement years. However, the word “income” is misleading. You do not live on dividends and interest, in particular, when interest rates are as low as they have been the past several years. You distribute a percentage of your assets each year, which includes principal. For example, you distribute 4% of your assets. The risk occurs when markets produce negative returns for prolonged periods of time (2000-2002). In this case, you distribute 4% in a year when the market value of your assets declines 10% so your total assets decline 14%. It doesn’t take too many years like this to create a disaster.
3. Run out of Money
Several studies have shown the biggest concern of current and future retirees is running out of money late in life when they need it the most. They do not want to live with their children or end-up in a skilled nursing facility for the indigent. To minimize this risk you have to take bigger risks during your working years to accumulate assets and you have to take more risk than you think during your retirement years to preserve the value of assets. The latter risk is exacerbated by rising longevity. Your assets may have to preserve their value and meet your distribution requirements for 30 years.
4. Prudent Investment Risk
There is prudent investment risk that helps you accumulate assets and there is prudent investment risk that helps you preserve the value of your assets during retirement. And, there is excessive or imprudent risk. Unfortunately, there is no financial expert that can draw the line between prudent and imprudent investment risk. Managing risk is more art than science because no one has a crystal ball that can accurately predict the future performance of the securities markets.
5. Bad Financial Advice
Given all of these risks, how good is your current financial advisor? Your biggest retirement risk, and the most hidden risk, is the quality of the financial advisor you select to influence or control the investment of your retirement assets. 75% of all advisors are really sales representatives who claim to be expert investment advisors. They make the claim to reduce your sales resistance because they know you do not question the advice of experts. They also want to be your friend. They know you will be more reluctant to terminate a relationship with a friend. If your advisor is really a sales representative you are in big trouble and you may not know you have a problem until the next stock market crash, or you do not have adequate assets for retirement, or you have to return to work.