5 Key Risks to Your Retirement Income

When the global financial crisis hit in 2008, many of those close to or in retirement suddenly felt unsure of their ability to maintain their retirement lifestyle after their portfolios went down so dramatically.

A fair number of those recently retired ended up going back to work and some who planned to retire shortly ended up delaying their retirement date. With our most recent market drop in the spring of this year, many Canadians at that same stage of life were left wondering what they needed to do.

Fast forward almost 12 years since the 2008 crash (and a few months since the 2020 one) and the markets have not only recovered but are again setting new record highs. For those able to rationally weather the storm and stick to their investment plans, the market downturn has left no lasting effects.

It was certainly a good wakeup call though and a lesson that some have already forgotten.

So now that we’ve rebounded from the spring lows, what major risks are poised to derail your current retirement plans? Will this recovery be a “V” or “W” shaped one? And should the answer to that really matter?

The answer for most people is no, it shouldn’t matter. While the majority focus on a market drop as their biggest retirement risk, there are less obvious but far more impactful risks that should be the focus of your attention.

This week I wanted to highlight the five main risks to your retirement so that you can evaluate how well your own financial plan is prepared:

1) Longevity – With continuous advances in modern medicine, people are living longer than ever before. Could your portfolio continue to provide income to age 90? What about if you live to be 100? A sound financial plan will have modern longevity built in.

2) Asset Allocation – Particularly important to review after a strong market year or years, how much of your portfolio is invested in equity holdings and do you have “safe” investments to draw from during a downturn? Maybe it’s time to take some “profit off the table” and move some of your equity holdings to less volatile investments. Proper diversity is key!

3) Inflation – The potential for rising prices to erode the purchasing power of your investments is ever present. Over the course of 25 years, a two per cent per year inflation rate will reduce your “purchasing power” by 40 per cent! Make sure you’ve taken a realistic inflation estimate into account when reviewing your retirement projections.

4) Withdrawal Rates – How much are you pulling out of your investments each year? Is the withdrawal rate you’re currently on a sustainable one? Some argue that you need more money in the later years of retirement for health costs while others prefer to spend it while they still can. For most, a middle ground between the two is probably right but it’s important to know what you can really afford.

5) Health Care Costs – Could a significant medical event severely disrupt your retirement plans? Or could the long term care costs of one spouse leave nothing left for the survivor to live on down the road?

Whether you’re about to retire now, still 15 years away or already well into your golden years, answering the above five questions can help identify pitfalls that you may not be prepared for. Being pro-active in your retirement planning can help you attain the retirement lifestyle you desire.

A Certified Financial Planner (CFP) Professional can help you identify the type of retirement you want and create a plan to help you achieve it.