If you are at or close to the age where you are planning to retire, you may be concerned about whether you will be able to generate enough income to give you the lifestyle you want. Being aware of the 5 key risks to your retirement income and making sure that you are protecting yourself will go a long way toward helping you to have the type of retirement that you want.
Risks to your Retirement Income
1. Canadians are living longer, healthier lives in retirement.
Being able to enjoy longer healthier life after work is a good thing, but it means that it’s reasonable to expect that one or both members of a couple who are aged 65 will live to age 90. If you are thinking of early retirement as an option for you, it means that you will need to have a way to fund 25-30 years of income after you stop working.
2. Inflation eats away at your purchasing power.
Inflation is a major threat to retirement plans. While it is not likely that we will see inflation rates increase to 1970s levels, a relatively modest annual rate of even 2 percent over a 25-year retirement period can erode a retiree’s purchasing power by 40 percent. A retirement portfolio must be able to keep up with inflation.
3. Lack of diversity in asset allocation is not the best strategy to fund your retirement.
Putting all of your retirement eggs in one basket is not the best approach if your goal is to have a well-funded retirement. The global financial crisis of 2008-2009 may have made many people hesitant about investing in the stock market, but equities can provide the type of long-term growth which you will need to fund your retirement. The best choice is to have a diversified portfolio which includes a combination of equities, cash and bonds to provide you with growth and help you ride out periods of inevitable volatility in the market.
4. An aggressive withdrawal rate increases your risk of outliving your investments.
To ensure that you don’t outlive your retirement savings, you will need to be conservative with your withdrawal rate. A safe withdrawal rate is the amount of money that you can withdraw from your investments each year to make your money last in retirement.
5. Increased health care costs can put a strain on your retirement budget.
Government programs and private insurance do not fund all health care costs. Paying for services which are not covered can deplete savings and interfere with cash flow.
How to Protect Yourself and Have the Kind of Retirement You Want
The key to having the kind of retirement you want is to have a written plan. Seeing the numbers is a good way to see where you are now and what you need to do to fund the retirement you want.