Pondering Financial Risks In Our Retirement

I have been thinking about scenarios that could have a negative on our retirement savings and contemplating possible solutions. Here are the major potential issues that I have identified so far:

Stock market crash or a long recession. With the recent stock market volatility and credit crisis, this appears to be the biggest risk to our retirement savings. Based on analyses by our financial advisor, our highest risk is below average market returns during the first few years of our retirement (i.e. right now). Interestingly, low returns in later years have less of a negative effect since the portfolio had an opportunity to grow initially.

While I have no solutions for a 10 year crash or recession, I believe we can weather a short term (one to three year) correction by putting a portion of my retirement savings in short term CDs, bonds and money market funds. Thus, if there is a market correction, we won't need to sell stocks at a loss to fund living expenses. Another option I am considering is to take on part-time work to slightly reduce the withdrawal amounts during the initial years of retirement.

Health issues. Thus far, we have been fortunate to have good health in our family. However, I recognize that a catastrophic health event can cause significant financial challenges. While future health issues are not predictable, we are taking the following precautions:

1. Lifestyle and food. We are consciously increasing our physical exercise and I am improving my eating habits. My spouse and I are doing weekly yoga classes, in addition to my weekly tennis matches. Over the next few months, I plan to add some running and weight training back into my regimen. While my wife has always been a very healthy eater, I have been a relatively poor eater. Since retiring, I have adopted some of my wife's food preference, resulting in me feeling better and losing about 10 pounds.



2. Medical insurance. As a retiree, I will be able to maintain my company's medical insurance, although at a much higher cost. However, I am glad to pay this insurance premium since it will provide some protection for our retirement savings from major health issues.



3. Long term care insurance. Both my wife and I have long term care insurance, which provides for the cost of nursing home, assisted living or home care if we should need it in the future. With the cost of nursing home care at $5,000 to $9,000 per month, we wanted make sure it can be covered in the future. Fortunately, since we are in our forties, the premiums are still relatively low and worth the peace mind we get.

Longer life. Recently, I have heard some scientific reports that the human body could make it to 150 years or more. However, disease and other factors keep people from reaching those ages. What if there are medical advances that enable 150 years of age during our lifetime? While I think our retirement savings will last 40 to 50 years, I'm not as confident it will last over 100 years :-) On one hand, I want to make sure we enjoy the next 5o years, but it could be devastating if we run out of funds in the final decades of our lives.

At this point, I don't have any firm solutions developed. One option I have considered is to use our home to fund the later stages of retirement. Since we will likely need a smaller home as we get older, the equity in our home could be monetized via a sale or reverse mortgage. Another option I will investigate is buying a variable lifetime annuity which will provide an income stream for the rest of one's life. While I don't think this a good option for us now, it may be something worth considering in our eighties or nineties.

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Photo Credit: Wikimedia Commons, CJ

This is not financial or insurance advice. Please consult a professional advisor.

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