In the last article, we looked at what I believe to be the greatest risk in retirement: retiring without a clear sense of calling and purpose. But I also mentioned some other risks—the financial ones.
The Bible encourages us to take wise precautions as part of good stewardship to protect ourselves from the adverse effects of challenges and risks that may affect our ability to provide for our families. Prov. 27:12 says, “A prudent man foresees evil and hides himself, but the simple pass by and are punished.”
Financial challenges and risks can be especially impactful in retirement when we no longer have a steady income from employment. There’s no way to avoid all of them or their adverse effects, so we do what we can with wisdom and humility, trusting God for the rest.
Risk #1–Longevity
In the previous article, I mentioned longevity as an over-arching risk because the longer a retirement lasts (and we don’t know how long that will be), the greater the chances that other forms of risk will manifest. Longevity is the fundamental financial risk facing retirees. As actuary Steve Vernon wrote in Forbes,
A more robust definition of longevity risk is “everything that can go wrong during a long retirement.”
That may sound a little strange since, in the Bible, longevity is a blessing; it’s good if God multiplies our days and adds years to our lives (Prov. 9:11). But we live (and work and retire) in a broken world, so a long life brings with it the risk that we could eventually run low on income for any number of reasons.
Did you know that some 20 percent of all people who have lived past age 65 are alive now, and the number is increasing? Increased longevity means more time for another financial crisis, more time for inflation to compound, and increased chances for an expensive health problem.
Here are a few things retirees can do to mitigate longevity risk:
1) Have a sustainable income strategy
Regardless of a retiree’s financial condition, developing a sustainable income strategy is probably the most significant financial challenge retirees face. Some, especially those with investable assets, may need the help of a trusted advisor to work out an appropriate retirement income strategy.
By the way, “spend until it’s gone” is not actually a strategy (although it can be fun for a while). But neither is holding on so tightly to what you’ve saved that you neither enjoy it nor use it for the joy of others. So, let’s look at some things you can do to help deal with longevity risk.
For further reading: Sustainable Retirement Income
2) Build a “safe income floor”
A great strategy to help deal with longevity risk, especially for those in the first three categories (struggling, just getting by, and even average), is to build a “safe income floor.” Having at least one “guaranteed” income source is essential, especially for those with less savings. For most, this will first mean maximizing their Social Security benefits—it’s the “sub-floor for the income floor.” But some will have other guaranteed lifetime retirement income sources like traditional pensions or annuities.
If you don’t have a pension or annuity, and you can, using some of your savings to buy an annuity is considered by economists as one of the best ways to build your “floor.” (Unfortunately, it’s also one of the least popular with retirees.) I generally recommend what are called “lifetime income annuities” or “single premium income annuities” (or SPIAs). Other income sources can add to your “income floor” such as annuities, a TIPS ladder, or even a reverse mortgage.
For further reading: Safe Income Floor
For further reading: Annuities
For further reading: Investing in TIPS
3) Control your spending
If you’re on a fixed income, the best thing you can do is control your spending. The less you spend, the less income you need. If some or most of your income is from savings, try not to withdraw too much each year; it’s best to use a systematic withdrawal approach using either a fixed or variable withdrawal strategy (perhaps starting in the 3% to 4% range and adjusting the initial amount for inflation each year following).
Most retirees probably consider a variable strategy, which will require flexibility depending on how your investments perform each year. No matter what, you must watch your spending and draw-down plan closely if you’re relying on withdrawals from retirement savings to provide some of your income and need it to last your lifetime.
For further reading: Spending in Retirement
Things can still go wrong
Vernon defined longevity risk as “everything that can go wrong during a long retirement,” as it more broadly includes several specific risks, some of which we have some control over and some of which we don’t. Depending on their duration and intensity, some of these risks may have a greater impact than others. But no matter what, it would be wise to anticipate them and plan accordingly.
I will categorize these other risks into four major areas: 1) Macro/market events, 2) Inflation, 3) Personal spending, and 4) Micro/personal events. We’ll also look at some general ways to deal with them.
Risk #2–Macro/Market Events
These are the things we have the least control over. But that doesn’t mean there aren’t steps we can take to both anticipate and deal with them.
Financial market volatility
Market volatility is nothing new. But when things get crazy, it’s best not to do anything based on emotion, especially fear or greed. (“Don’t just do something, sit there” is usually good advice.) Why? Despite several crashes and two recessions, the S&P 500 is up about 300% over the last 20 years. Will that be the case over the next few decades? I have no idea (and by the way, if someone says they do, they probably want to sell you something.)
The best way to deal with market volatility is to use a diversified investment strategy using stocks and bonds, perhaps mixing in some other asset types in small quantities. Stocks are risky and tend to perform best over long periods. Bonds also carry interest-rate and default risk but are usually less volatile than stocks. Periodic rebalancing can help maintain a diversified portfolio. Also, try to keep costs as low as possible; they matter more than you think.
For further reading: Stock Market Volatility
Interest rate volatility
Interest rates determine payouts on CDs, savings accounts, and fixed-income investments (bonds), but also the cost of mortgages and other forms of debt.
After almost two decades of near-zero interest rates (thank you, Fed), rates have risen dramatically over the last 18 months, catching many investors, potential home buyers, and other borrowers off-guard. And, for the first time in a long time, stocks and bonds lost money in 2022, negatively impacting many retirees’ savings, including those with “conservative” asset allocations.
Those with variable interest rate debt, such as adjustable-rate mortgages, were most negatively affected. The best way to mitigate these adverse effects is to avoid debt with high (variable) interest rates as much as possible (credit cards, for example). If you’re investing, select investments that meet your income needs and have a time horizon suited to those needs.
If you have cash just sitting in a checking or savings account, consider moving it to a higher-interest-yielding account while rates are high—you’ll earn much more interest than you did a year ago (that’s the silver lining to today’s higher rates).
For further Reading: Do Bonds Belong in a Retiree’s Portfolio?
Public Policy and Taxation
Public policy (meaning politics) and taxation are a bit of a wild card because, to be blunt, it’s at the whim of the federal government, but try to stay on top of changes that may affect you. For some, big changes in tax laws and government benefits can significantly impact your financial situation. For instance, SECURE Acts 1 and 2 have improved some things for retirees, like delaying the RMD age to 73.
When it comes to taxes, you shouldn’t be too worried unless you’re earning tons of money from multiple sources. Those with taxable retirement accounts like IRAs and 401Ks will have to pay taxes when they withdraw the money (Roth accounts are the exception). Some will also have to pay taxes on their Social Security benefits if they have other income sources. The best thing to do is stay in lower tax brackets and have very little income taxed in your next higher marginal tax bracket.
For some, Required Minimum Distributions (RMDs) could have adverse tax impacts by “forcing” you into a higher marginal tax bracket. Fortunately, you can use some IRS-approved methods like Qualified Charitable Distributions (QCDs) and Qualified Longevity Annuity Contracts (QLACs) to remove some of the sting of RMD taxes, but most won’t eliminate taxes altogether.
For further reading: Investing and Taxes
For further reading: Secure Act 2.0
For further reading: Thinking About RMDs
Sequence of Returns
Sequence risk is one you need to be aware of if you plan to retire soon or have recently and need to fund a part of your retirement with a risk-based portfolio.
Sequence of Returns is when poor returns early in retirement can lead to an increased spending percentage from your reduced savings (it’s like taking water out of a bucket with a hole in it). Yikes! In simple terms, poor returns early in your retirement can mess up your income strategy, making it harder to recover over a long retirement.
To minimize this risk, it’s best to make your investment asset allocations more conservative as you get closer to retirement (what some financial professionals call a “glide path”). You could also consider the “safety first” strategy or talk to a trusted financial advisor to determine what’s best for you.
For further reading: Sequence of Returns Risk
Risk #3–Inflation
Inflation is actually a macroeconomic event, but I have it in its own category because, as we all know, it can be so significant.
Inflation has been in the news lately, but it’s a sneaky risk that retirees often overlook. Rising prices slowly erode your purchasing power, which is a big deal for retirees living on a fixed income. And it’s even worse over long periods—like when the cost of living doubles in only 23 years at an average inflation rate of just 3% per year, which was the case BEFORE 2022! So, even if you’re earning enough money to cover your expenses today, you might not be able to do so in the future if inflation keeps rising at the current rate.
As individuals, we have no control over inflation. Still, there are some things we can do, and the most effective one is to adjust your spending (perhaps by cutting some discretionary expenses) and shop wisely. You can also explore private or public assistance if you can’t do that.
If you’re an investor concerned about higher-than-normal inflation in the future, consider adjusting your portfolio to include assets that tend to perform well during inflationary periods, like TIPS and commodities. Real estate (like land, not real estate funds, necessarily) also tends to do well during inflationary times, so owning a house can help in the long run.
For further reading: Inflation
Risk #4–Personal Spending
We generally have more control over these risks, but not always.
Debt
The Bible never calls debt a sin (although some of the underlying causes can be), but it can certainly be a significant burden, especially for retirees.
Once we stop bringing in a regular paycheck, it can be much harder to pay off accumulated debt. Plus, debt payments require money you can’t use for other purposes. If you’re in retirement with debt you can’t handle, see if you can at least work part-time and use the money to pay it off. If your home mortgage is the problem, refinancing may help from a cash flow standpoint (but not now when rates are so high); downsizing may be a better idea, especially if you can eliminate your mortgage payment altogether.
For further reading: Don’t Carry Debt Into Retirement
Healthcare expenses
We all know that our healthcare needs will likely increase as we age. Fortunately, Medicare (Parts A and B) will greatly help, and almost all retirees have traditional Medicare. But Parts A and B don’t cover all costs, so it’s essential to plan accordingly. You don’t want to spend all your retirement funds on medical bills! And don’t forget about those pesky co-pays and deductibles!
If you don’t already have this worked out, consider getting a Medicare supplemental plan (aka a “Medigap” plan) or a Medicare Advantage Plan (known as “Part C”). They are pretty different, so make sure you understand their differences well before purchasing one or the other. There are also Part D prescription drug plans, which aren’t part of Medigap plans but are included in Part D Medicare Advantage plans.
Confused? Of course you are; almost everyone is! That’s why it’s crucial to do your homework and get wise counsel before you decide. Even if you’ve already bought one or the other, you can change under certain conditions, but it may not be as easy as you think.
For further reading: Planning for Healthcare Expenses
Housing and care
As we age, our housing and care needs may change as well. Long-term care insurance can be costly, so your best bet may be to rely on your home equity or Medicaid assistance. If you require caregiving, consider having a family member or licensed caregiver help in your current residence to save money.
For further reading: Long-Term Care
Risk #5–Micro/personal events
Last but not least, unpredictable personal events can come up. These things might happen; when they do, they sometimes come suddenly and are almost always unexpected.
Fraud and theft
Fraudsters and scammers are out there, and they love targeting retirees. Don’t be a victim! Be extra careful with whom you trust, and never share private information in an email or text, even if the requestor looks convincingly real. Use 2-factor authentication on your critical financial websites, and for crying out loud, don’t use the same password for everything (most people do)! Consider using an online password vault to generate different strong passwords for each online account and keep your password information safe.
For further reading: Schemes and Scams and Fraud
Cognitive impairment
In the event of cognitive impairment (due to injury or illness, such as dementia), you may be unable to manage your finances or state preferences for medical treatment. The sooner you get help, the better, and having a Power of Attorney and your Advanced Health Care Directive in place can be very valuable in delegating those things to a trusted party (typically your spouse).
For further reading: Your Coming Weakness
Unwise financial decisions
This can be caused by cognitive impairment, poor judgment, or being taken advantage of by an unscrupulous financial salesperson. Don’t pay someone to lose your money! Having someone you trust to offer input and working with a fee-only financial advisor can help in these situations.
For further reading: Wisdom
Death or incapacitation
Dealing with the loss of a spouse or their incapacitation is a challenging and emotionally taxing situation. As Christians, we have eternal hope in Christ, but we still feel personal loss and grief. When this happens, many financial tasks and decisions must be taken care of, which can be overwhelming. It’s best to delay making major decisions whenever possible when you’re struggling mentally and emotionally. Seek help from trusted family, friends, a pastor, and financial experts when needed. The importance of both spouses having their affairs in order can’t be overstated.
For further reading: Estate Planning and Your Will
Trust in Him
These uncertainties and risks present challenges to retirees, so we do what we can with hearts filled with trust and confidence in God’s sovereign plan and his providential care. Most of us learned early in life that we must accept some risk and uncertainty and that much is out of our control.
Therefore, we need to turn to the one who controls all things, seek his help and guidance, and secure in the knowledge that God’s promises remain unwavering and His presence unchanging. Just as the Israelites were led through the desert, we can journey forward in retirement, in faith, and with the assurance that we are held fast in the loving arms of our Savior.
For further reading: A Gospel-Centered Retirement