Most people don’t realize just how important Luck is to having a successful and enjoyable Retirement. Let me Explain…
In Conventional Retirement Planning you compute your “Retirement Needs” by estimating your Lifespan, your Projected Rate of Investment Return, your Projected Rate of Inflation, your Projected Savings Rate and your Projected Expenses decades into the Future. You compute how much money you will need in your Retirement Portfolio to last your Lifetime.
What happens if you Retire at the Beginning of a Bear Market? What happens if you Retire at the start of a Hyper-Inflationary Period like we had in the 70’s? What if you Live until you are 120? Will those “Retirement Needs” estimates still be valid?
3 Financial Retirement Risks
You are exposed to 3 Primary Financial Risks in Retirement.
1. Longevity Risk. How long will you live? Most of us don’t know the answer to that question. That’s why it’s a Good Idea to have your Essential Expenses covered by a Guaranteed Income Stream like Social Security, a Pension, or an Annuity. Non-Essential Expenses can be paid from your Retirement Portfolio.
2. Market Risk. How much will your Investment Portfolio earn? No one knows for sure. If someone tells you otherwise…Don’t let them manage your Money. Historical Investment Returns are a Good Predictor of Future Risks, but, not necessarily of Future Returns.
3. Inflation Risk. How High will Inflation be during your Retirement? The Answer is Unknowable. A 3% Average Inflation Rate will eat up nearly 60% of your Portfolio’s Purchasing Power during a 30-year Retirement. For Example: a $500,000 Nest Egg would be worth $206,000 after 3 decades.
Solutions
So, what do you do to make sure you don’t get “Unlucky” with your Retirement?
1. You Save as much as possible, as soon as possible, as often as possible. The Essence of Retirement Investing is the Deferral of Current Income for Future Consumption.
2. You Diversify your Investments across several Asset Classes by buying Broad Market indexes.
3. You Spend Less. You live a “Thrifty Life.” You don’t need to be a Miser, just Frugal.
After all…We only get One Chance at our Retirement…We better get it Right…Let’s Not depend on Luck.
So, What do you think? Are you Ready for Retirement? Do you have any Questions, Comments, or Suggestions?
