We’ve all heard stories about people losing all their retirement money in a stock market crash, outliving their money, or incurring unexpected medical expenses that force 80-year-olds back into the labor pool. Are these fears likely to become realities? Probably not, but here’s how you can deal with them.
1. Outliving your money —
There’s a rule of thumb to decrease the odds of outliving your money over a 25-year retirement: by the time you’re ready to retire, you should have saved eight times your annual salary. To get there, gradually work up to it. Of course, the amount of money you’ll need to have saved by the time you’re ready to retire depends on a huge range of very individual factors: What are your plans for retirement? How old are you? Will you still have a mortgage? Do you have long-term-care insurance? So, to truly decrease the odds that you’ll outlive your money, work with a financial advisor to develop a robust retirement plan.
2. High inflation —
What if inflation went up to 12–14% as it did in the 1970s? It’s probably not likely inflation would spike like that again. However, because it has happened before, you’ll want to be prepared. This is where an annual review of your investments can be wise. That is the point of diversification: if you are properly diversified, your portfolio should include investments that move opposite of each other — so when one asset class or subclass is down, another is up.
3. Unexpected medical expenses before retirement —
Unexpected medical expenses you may incur while you are still working could totally derail your retirement. To prepare for them, it’s important to have insurance in place, such as disability and life insurance. Disability insurance will ensure that if you do lose your income due to a disability, you will still be able to take care of your necessities. Life insurance will protect your family in the event of your death — especially important if your income was the key to your spouse’s retirement.
4. Unexpected medical expenses during retirement —
For most people, health care is one of the largest (often the largest) expense incurred during retirement. There are a few ways to prepare for medical emergencies: private health insurance to fill the gaps in Medicare, long-term-care insurance, and rainy day savings. For today’s retirees, Medicare takes care of most medical expenses, however, you need savings to cover what insurance won’t — like copays and expenses exceeding your insurance limit. And just as you save before retirement for unexpected expenses, so should you continue your rainy-day fund in retirement. Even if you are adequately insured, copays can be significant if you have a medical emergency.
5. Market crash —
As with high inflation, the key to surviving a market crash is diversification. There is no way to insulate yourself completely from the effects of economic turmoil. But you can take steps to ensure that turmoil doesn’t completely ruin your retirement plans. As you get closer to retirement, you should be invested less heavily in equities and more in investments such as bonds.