In continuing our series on threats to your retirement investment success, we’re taking a deep dive into why a long life can cause problems for your financial future. Most people want to live a long and healthy life and survive long enough to thrive in and enjoy retirement. But, increasingly long lives pose a threat to retirement known as longevity risk. The issue itself is not the length of your life, but the additional risks your financial well-being is exposed to each additional year can contribute to a financial catastrophe. Shifting market returns, inflation, increased housing or medical costs, and other factors outside of your control can compound annually and diminish your retirement fund’s efficacy.
Why a long life increases retirement risks
When building your retirement income plan, running out of money is usually a primary concern. When your income is determined by assets and requires regular withdrawals, managing your plans can be incredibly difficult – unforeseen problems can mean the difference between future prosperity and survival. Ideally, you finance your retirement based on the interest your gain from assets, but selling the principal assets to cover unexpected costs can cause greater issues in the future.
So what’s a retiree to do? Many advisors counsel conservative investment strategies to reduce your risk of negative returns, but this can limit potential growth as well. Reduced growth means a higher likelihood of selling your principal investments. Either solution can mean reduced withdrawals in the future and a lower standard of living that can lead to a downward spiral in your financial and physical life.
How to manage longevity risk
As with sequence of returns risk, traditional portfolio management principles fail to address all the risks and possible outcomes of investment strategies. Even with an average return of 7%, you cannot count on that solving your challenges due to sequence of returns risk. Failing to plan for negative eventualities will only more pain and struggle in the long run.
The solution is an investment strategy based on financial models and sound strategies to reduce your risk exposure while still capturing upside returns. We like Warren Buffett rules to finances:
Rule #1: Don’t lose money
Rule #2: See rule #1
A large part of making these strategies a reality requires removing emotion from investment management. Making decisions based on fear, reactionary selling, FOMO, and more can reduce your return (as well as your principal) and keep you from thriving in retirement, rather than just surviving.
Our approach to managing retirement accounts has a proven track record of success. Want to learn how we can help you achieve investment success through our holistic approach to financial models? Complete our questionnaire to get a picture of what we can do for you.