Retirement Plan

Government policies affect many aspects of our lives, including the financial position of retirees, and these policies often change over time. Policy risks include possible increases in taxes or reductions in entitlement benefits from Medicare or Social Security.

Retirement planning should not be based on the assumption that government policy will remain unchanged forever. It is also important to know your rights and be aware of your entitlement to state and local authority benefits.

Facilities or caregivers are sometimes not available for acute or long-term care, even for individuals who can pay for it. Couples may be unable to live together when one of them needs a higher level of care.

For people who have lived together for decades, this can result not only in increased costs but in emotional stress. In general, long-term care costs are an important reason that retirees run out of money.

Divorce or the separation of a cohabiting couple can create major financial problems for both parties. It can affect benefit entitlement under public and private retirement plans, as well as individuals’ disposable income.

Splitting the marital assets will almost certainly lead to an overall loss in standard of living for both parties, especially if their lifestyle had been maintained by pooling income and resources. Two individuals in their own homes will need about 20 percent more income to maintain their standard of living, compared to those individuals remaining in the same home. This is because some expenses, such as rent and utilities, remain the same, regardless of the number of people living in a household.

Although divorce rates among older couples are far lower than for younger couples, it is not uncommon for a retirement-age couple to get a divorce. Prenuptial agreements may be used to define each party’s right to property prior to marriage. Postnuptial agreements are similar, but signed after marriage.

Grief over a spouse’s death or terminal illness contributes to depression and even suicide among the elderly. Then there’s the financial impact: A spouse’s death can lead to a reduction in pension benefits or bring additional financial burdens, including lingering medical bills and debts. Also, the surviving spouse may not be able or willing to manage the finances if they were usually handled by the deceased.

Financial vehicles are available to protect the income and needs of survivors after the death or illness of a partner or spouse, such as life insurance.

Running out of money is one of the primary concerns of most retirees. Longevity risk is an even larger concern today, as life expectancy has risen. One’s life expectancy at retirement is just an estimate, and many will live longer.

Not dying soon enough sounds an odd thing to worry about, but planning for just enough income to live to your predicted life expectancy will be adequate for only about half of retirees. The longer you live, the more exposure you may have to other risks that are listed below.

Those who are managing their own retirement funds over a lifetime have to perform a difficult balancing act. Being cautious and spending too little might needlessly restrict your lifestyle—especially in early retirement when you are the healthiest and most mobile—but spending too much increases the danger of running out of money.

A pension or an annuity can mitigate some of the risk because they can provide an income stream for life, depending on the type. However, there are some disadvantages, including loss of control of assets, loss of ability to leave money to heirs, and cost.

Many retirees plan to supplement their income by working either part-time or full-time during retirement. In fact, some organizations may prefer to hire older workers because of their stability and life experience. However, success in the job market may also depend on technical skills that retirees cannot easily gain or maintain.

Employment prospects among retirees will vary greatly because of demands for different skills and may change with health, family, or economic conditions.

Choosing the point at which you want to retire is integral to retirement planning. Retiring later is an alternative to increasing saving, but there is no certainty that appropriate employment will remain available. Working part-time is an alternative to full-time employment, and part-time jobs may be easier to obtain.

These are a big concern for many retirees. Prescription drugs are a major issue, especially for the chronically ill. Older people usually have greater healthcare needs and may require frequent treatment for a number of different health-related issues. Private health insurance is also available, but it can be costly.

Lower interest rates reduce retirement income by lowering growth rates for savings accounts and assets. As a result, individuals may need to save more in order to accumulate adequate retirement funds. Annuities yield less income when long-term interest rates at the time of purchase are low. Low real interest rates will also cause purchasing power to erode more quickly.

Lower interest rates can reduce retirement income and can be particularly risky when people are depending on drawdown from savings to finance their retirement. On the other hand, a problem also exists if interest rates rise, as the market value of bonds drops.

Increases in interest rates can also negatively impact the stock market and the housing market, thereby affecting the retiree’s disposable income. All the same, because of their effect on savings income, high real interest rates, over and above rates of inflation, can make retirement more affordable.

Stock market losses can seriously reduce retirement savings. Common stocks have substantially outperformed other investments over time and thus are usually recommended for retirees as part of a balanced asset allocation strategy. However, the rate of return that you earn from your stock portfolio can be significantly lower than the long-term trends. Stock market losses can seriously reduce one’s retirement savings if the market value of your portfolio falls.

The sequence of good and poor stock market returns can also impact your retirement savings amount, regardless of long-term rates of return. A retiree who experiences poor market returns in the first couple of years in retirement, for example, will have a different outcome than a retiree who experiences good market returns in the first couple of years of retirement, even though the long-term rates of return might be similar.

Early losses can mean less income during retirement. Later losses can have a less-negative impact, as an individual may have a much shorter period over which the assets need to last.