You are financially stable but worried about your investment portfolios. What happens to your 401k if the stock market plumets? Will you have time to financially recover before retirement? Now is the time to diversify and hedge against the risk of market drops, currency inflation, and unexpected lifetime longevity. What other risks should concern you?
You may have enjoyed the attention of headhunters in your field wanting the best and brightest candidates throughout your 30’s and 40’s. Or you may have moved up the ranks of a single company, being rewarded for your loyalty and hard work. However, something changes in your 50’s and 60’s. Headhunters stop calling. Promotion opportunities dry up. And you may become blindsided like so many before you when your company decides to replace you with someone younger who can be paid less. In a national study of 20,000 people from age 50 in 1992 through the remainder of their lives, 56% of workers in long term, full-time positions lost their jobs involuntarily[1], making the likelihood that this may happen to you quite real.
While your company likely appreciates the contributions you’ve made, they may decide, without your input, that it’s time for you to retire. After the shock wears off, you think, no problem. With your experience, what company wouldn’t want you? However, the sad truth is that companies would rather hire someone young with plenty of years of contributions ahead of them, someone whom they can pay a low starting salary, rather than hire an experienced candidate who costs a premium and has an expiration date. The best way to handle this possibility is to plan as though it’s a certainty, and hope it never occurs. If you are financially stable enough that you could retire today, then you won’t be devastated if the decision is unexpectedly made for you.
[1] from a Health and Retirement Study (HRS) examined by The Urban Institute (a Washington, D.C. Think Tank) and ProPublica
Actually, the better question would be how much annual income would suit your ideal retirement? Your day-to-day living would look quite different if you are receiving $50,000 annually than if you are receiving $100,000 annually. Start by looking at your current net earnings and bills. How much are you currently living on annually? Once you decide how much money you would need annually to maintain a retirement lifestyle, you must then calculate how much you would need to withdraw from your retirement sources in order to receive that amount after taxes. Below are a few possible outcomes using the 2021 tax code without potential deductions taken into account.
*Minimum required distribution **Life Insurance Retirement Plan
Outside of taxes, an expense many pre-retirees don’t foresee is the amount of recreation, restaurant, and vacation money they will use. Think about your typical week. You likely work Monday through Friday and reserve “going out” for the weekends. But what happens when Monday through Friday suddenly become part of your weekend? You will likely get cabin fever if you attempt to stay home all five weekdays. What typically happens is that retirees start spending their weekdays the way they used to only spend their weekends. Funding retirement isn’t only about being able to pay your bills and buy groceries. It’s also about having the freedom to live. Schedule a consultation today to find out what sort of retirement you have saved for and how you might be able to save more.
The biggest factor plaguing retirees is the worry that they will live too long. Perhaps after you’ve done the math on how much you need to withdraw from retirement sources annually, including the expense of living weekend days every day, you realize that you only have enough to last you until you turn 80. That’s a decent length of time after retirement, but what happens if you live to be 85 or 90? Who bears the financial burden of supporting you? Your kids? A government-funded nursing home? Nothing will increase frailty and diminish good health like worry, and the closer you near to 80, the more worried you would be. Perhaps that worry deteriorates your health enough that you don’t make it to 80. Perhaps worry over limited funds for retirement is the reason the average life expectancy in the U.S. is 80.
How many people are prepared to live to 100? How many more people would live to 100 if they were financially secure enough to do so?
At this stage of life student loan debt should be eliminated. If it hasn’t been, then a take it or leave it offer for a fraction of the remaining debt may be in your best interest to start freeing yourself of this burden. If you are still paying for a car note or a mortgage, you must consider how much longer these payments will continue and factor this expense into your retirement savings considerations, either in having enough saved to continue making these payments or in paying off these debts so you have more money to save towards retirement and less overall that you’ll need once you retire.
A surprising number of individuals are still supporting dependents well into their 50s and 60s, whether it be their post-college child who can’t afford to move out, a grandchild who relies heavily on their support, or a young child of their own as a result of a late-age pregnancy. Even if a dependent isn’t directly living with you, you may still be supporting your kid through college or helping your kids pay their own bills. The financial stability of your children will play a large role in both your ability to save for retirement or in how much you will need to save towards it. The final type of dependent you must consider is your parents. Perhaps they are supporting themselves now, but what happens when they need home help? What happens when they need full-time care? Do they have enough money saved up to take on that burden themselves or will that burden fall on you? It’s a tough thought to consider but one that can’t be overlooked if you are truly planning your financial future.
As recently as August 2000, the Dot-Com Bust devastated 401k savings. Retirees dependent on distributions from their 401k could not afford to wait for the market to recover. That loss was felt deeply. Those nearing retirement may have simply chose to continue working longer than they would have liked. And just when the market had almost bounced back, the Global Financial Crisis of 2008 devastated the market once more. Between both events, the market fell 54%, second only to the 1929 Crash and Great Depression, and took 12 years and 9 months to recover.
Even more recently, the COVID-19 Pandemic created a 20% drop in the market in 4 weeks that took 8 months to recover. Can your 401k afford to take these sorts of hits? How long will the market take to recover next time? Months or years? You can’t truly be confident in your ability to fund your retirement when the majority of your funds are susceptible to market losses. So what can you do?
Will Rogers advises, “Don’t gamble! Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” If only it were as easy as that, but perhaps we can get close. Indexed Universal Life Insurance Policies offer both insurance and cash savings, both of which receive exposure to the stock market. However, what makes IUL’s so attractive is that the money you invest is only susceptible to gains and can never sustain losses. No investment fund or 401k can offer your money the protection that insurance policies can. You have only to look at the most secure financial institutions: banks. “Many banks have more invested in life insurance policies than they do in bank premises, fixed assets and all other real estate assets combined,” says Denver Nowicz, Equity4Profit. You need only to look at a bank’s assets and liabilities to see the truth of this assertation (view examples on Banking Truths). To find out more about IUL’s or other options that can protect you from market risk, schedule a consultation today.
Of course, you can always put a large lump sum into a financial vehicle that will guarantee you a lifetime income until you die, whether that be at 80 years old or 100 years old, like an annuity. The risk with this sort of investment is that should you die only a few years into retirement, the insurance agency keeps the remaining funds. The flipside of that would be that if you outlive your investment, the insurance agency will continue paying you the agreed upon amount. If the risk bothers you too much, you can request other guarantees like a cash-back guarantee if you die before a certain age so that you can add to your heir’s inheritance. Or you could do an annuity that lasts until you and your spouse both pass away, ensuring your spouse will not be left without financial stability if you pass away first. Schedule a consultation today to see what solutions can shore up your current risks, whether it’s the risk of longevity or the risk of the market.
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