People retiring this year can expect to live another 20 years, according to estimates from Social Security. But in making our financial plans, it's a good idea to account for 30 years or even more, since roughly one in five of us will live past age 90.
Once you're retired, you live on a fixed income. There are no more cost-of-living raises, bonuses or employer contributions to your retirement plan. Even if you can afford your lifestyle today, you have to worry about what is going to happen over the next 30 years. Will Social Security keep up? Will your investments produce enough income? Will you outlive your money? Here are four major issues to consider when planning your financial future:
Stock market decline s. Fidelity Investments reports that the average 401(k) plan balance at the end of 2013 was $270,000 for workers "age 55 or older who have been active for at least 10 years." That balance is likely even higher now, since the S&P 500 has increased almost 6 percent so far in 2014. The stock market has been going up for the past five years and stands close to historical highs. But some people, like Yale economist Robert Shiller, warn that the market may be nearing a peak and could be headed for a fall. One risk to your retirement nest egg is a 2008-style stock market collapse, when the market went down 38 percent, or a three-year decline like what happened in 2000 through 2002. Nobody can predict when the next bear market will come along, but you need to be prepared if one does show up.
A rise in interest rates. Interest rates have been in a long-term decline since the early 1980s. With few exceptions, bond investors have benefitted not only from the interest they've received, but also from the increasing value of their bonds. However, just as bonds go up when interest rates decrease, they will also go down when interest rates increase. The bonds or bond mutual funds you hold could lose a lot of value if interest rates start to rise. Financial experts have been predicting for years that interest rates will go up. So far they have been wrong. And Fed Chairman Janet Yellen has reassured investors that interest rates will stay low. Maybe they will, but there's no guarantee.
Inflation. Medical expenses have increased significantly over the past 30 years. And the Consumer Price Index -- the price for an average basket of goods and services -- is 235 percent higher than it was in 1983. A collection of items that cost $100 back then now costs $235. While inflation has been tame recently, it may be starting to perk up. According to the Bureau of Labor Statistics, the CPI went up just 1.5 percent in 2013. But have you been to the grocery store lately? The price of food is going up, especially the cost of meat and dairy products. That may presage more inflation in the future.
Your own individual risk. There are also risks that are specific to your personal situation. Do you have a pension? If your old company goes bankrupt, your pension is likely insured by the Pension Benefit Guaranty Corporation. But some private companies, especially small firms, are not covered. Public pensions are not covered either. They have their own legal protections, but nothing is ever certain. Ask the retirees in Detroit. Other individual risks include your local real estate market, which could affect the value of your house, and the financial strength of your insurance company, which could impact your future coverage.
There's no reason to panic over any of these risks, but it is smart to be aware of them and prepare for possible problems. The best defense against future unknowns is to keep your IRA or your 401(k) in a diversified portfolio of stocks, bonds and cash equivalents, and to have several different sources of income, including Social Security, a pension and your own savings. Perhaps most important of all, you also need the security of being able to rely on friends and family to help when you need it.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.
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