Retirement Risks

Your Longevity Compounds the Inflation Risk of Your Retirement Income

It has only been since the Baby Boomer generation began to cross the retirement threshold that we’ve had to seriously confront the new challenge of our longevity. Although most of us are now bracing for the probability of living 20 to 30 years in retirement (nearly double the retirement life spans of our grandparents), what isn’t quite as clear is that our actual longevity is a moving target. That is, the older we get, our life expectancy increases, and that can have serious implications for the way we plan for our retirement income.

Understanding the Money Value of Time

In the realm of financial planning, time is our most valuable asset.  It’s available to all of us, providing each individual with the same opportunity to optimize its value in building wealth. It’s the only resource we all have over which we have some degree of control. However, it is a wasting resource if it is not optimally utilized.  Each day that passes, without some contribution of money, either in savings or interest, the cost of our financial goals increases. As time marches on, the obstacles to achieving goals of any time horizon become increasingly insurmountable. 

Confusion abounds for many would be retirees

The process of preparing for retirement is a confusing task for many would be retirees. Surprisingly the real key to a happy and successful retirement isn't just about the money.  Here's a real life story of how one couple overcame the challenge through advice from a professional retirement income planning specialist.

Clayton and Helen first met Conrad at a Retirement Planning Seminar.  They were both winding down their careers and were anxious about giving up their “paycheques” when they finally decided to pull the plug on work.  They felt that they had decent enough pensions and managed to save a considerable amount of money over the years.  The problem was, investments were spread out among a couple of banks, a life insurance company and an independent mutual fund representative.  They really weren’t sure if it was invested properly or if it would be enough.  They had no overall plan, and found it difficult to monitor things when they were so spread out. 

Retirement Income Planning Requires Realistic Spending Assumptions

If you have read any literature on retirement planning or have received advice from a financial professional, chances are you were presented with the 70% rule, the one that suggests that retirees will need between 70 and 80% of their pre-retirement income in order to maintain their standard of living. There are several flaws with this formula, the least of which is that it doesn’t consider your actual income and expenses at the time of retirement.
Retirement income planning needs to be grounded in today’s realities and it must anticipate the cost of aging, not just the cost of inflation. It also must be based on the practical expectation that you will only be able to save as much as you are able to sacrifice while you are working. More planners are applying the concept of “consumption smoothing” that combines an attitude about current spending and lifestyle needs with a vision of the same in retirement.

Longevity Risk: The Biggest Real Retirement Risk You Haven’t Covered

This isn’t our parents’ or grandparents’ retirement anymore. Just a few decades ago, many retirees enjoyed the full benefits of the “three-legged stool” of retirement provided by guaranteed pension payments, savings, and Social Security. In addition, they didn’t have to be very concerned with how much of their income translated into actual purchasing power because, except for the mid to late seventies, inflation was not a big factor for several reasons. Today, the three-legged stool is barely standing on two legs and inflation, even at the lowest levels, can wreak havoc on our lifestyles due to the fact we are living 12 to 15 years longer.

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