Americans are more at risk than ever before of not being able to maintain their same standard of living after they retire. The National Retirement Risk Index shows that in 2012 the number of at-risk households increased from 44% to 53% in the previous five years. This reflects the effects of the poor job market, uncertain investment returns, low interest rates, and low participation in retirement plans.
People are understandably nervous. According to the 2012 Retirement Confidence Survey, nearly half of working Americans are not confident they’ll have enough money to see them through retirement. Here are two risks you should to consider when you evaluate your current retirement plan.
1. Longevity risk is the risk that you’ll outlive your savings. For a couple age 65, there’s a 50% chance that one of them will live to 92. When Social Security was enacted, the average age of male mortality was 64, so half of men weren’t even expected to live to collect their full retirement. We believe that longevity risk is a critical factor to consider when developing your retirement plan.
2. Inflation risk is the chance that inflation will outpace the growth of your investments, thus reducing your purchasing power. At a 2.5% inflation rate, costs will double by the time a 65-year-old turns 92. One way to counter inflation risk is to invest in a well-allocated and well-diversified portfolio that may have the potential to outperform inflation over time.
Ensuring you will have enough to fund your retirement no matter how long it lasts requires planning for accumulation, distribution, and risk management, including the risk that your life lasts longer than your assets. It also requires a periodic review of your plan.