4 Big Retirement Risks—and How to Prepare for Them
by Terri Jones
You cannot control unexpected events in your life and the markets, but these tips from
Merrill Lynch Wealth Management can help you limit their impact.
Some common retirement mistakes—like overspending, investing too conservatively or veering away from your plan—are easy to avoid with a little discipline and forethought. Other risks—like a health crisis or a market downturn—cannot be avoided, but they can be managed. Here are four of the most common dangers to your retirement strategy, and steps you can take to prepare for them.
1. OUTLIVING YOUR MONEY
Thanks to medical advances and healthier lifestyles, Americans are living longer than ever. That is great news, but it also creates the very real possibility that you might outlive your retirement assets—especially when 37% of retirees underestimate their own likely lifespan by five years or more, according to a 2015 study by the Society of Actuaries.
“People look at how long their parents or relatives lived. But life expectancies have grown markedly from one generation to the next,” says Nevenka Vrdoljak, director of Retirement Strategies at Bank of America Merrill Lynch.
What You Can Do:
Think about delaying the age at which you claim Social Security. “By claiming at age 70 as opposed to 62, your monthly income goes up by 76%,” says Vrdoljak. Though you sacrifice income early on, knowing you will have higher Social Security payments in your seventies and beyond is like having “longevity insurance,” she adds.
Find out whether an annuity might be appropriate for you. Investing in a lifetime income annuity could help you avoid the risk of outliving your retirement savings by providing a path to income for as long as you live. Because annuities come with certain costs and risks, be sure to talk to your advisor about all the pros and cons before making a decision.
2. CHANGES IN MARKETS
If there is a significant market drop shortly before or early in your retirement—just as you are starting to tap into your assets—the value of your investments could shrink to an extent that undermines your retirement security. Even if the market subsequently improves, “If the first four or five years of your retirement are bad, it can be difficult to recover,” Vrdoljak says.
What You Can Do:
Take a second look at the way you invest. As you near retirement, shifting to a more conservative investment approach may help protect against market downturns. At the same time, it is important to maintain some exposure to stocks to create a suitable balance.
3. INFLATION
Although quite low in recent years, inflation—even a modest percentage—reduces your spending power over time. People living in retirement are especially vulnerable. Over a 25-year period—probably a reasonable expectation for the length of your retirement—a relatively low inflation rate of 2.5% can bring the value of every $100,000 saved down to about $54,000, according to calculations by Merrill Lynch.
What You Can Do:
Consider investments that could grow along with inflation. “That might be real estate or shares of stocks,” Vrdoljak says. If you have bond holdings, you may want to consider adding some Treasury Inflation-Protected Securities (TIPS). These government bonds offer returns that vary with the inflation rate. When interest rates go up, bond prices typically drop, and vice versa. “If inflation accelerates for whatever reason, you get compensated for that,” Vrdoljak notes.
4. RISING MEDICAL EXPENSES
“When it comes to financial planning, people do not systematically plan for health care risks,” Vrdoljak says. According to the U.S. Department of Health and Human Services, almost 70% of Americans over 65 will at some point need long-term care—which can include not just residence in a care facility, but help with daily activities like bathing or assistance with household chores. Even without such costs, it is likely that your health spending will increase as you age—and it is important to note that Medicare does not fully cover these costs.
What You Can Do:
Plan early for long-term care. Some people may be able to pay for out-of-pocket long-term care or are able to rely upon grown children or a relative for assistance. But for many others, long-term care insurance may be the answer. If you do choose long-term care insurance, try to purchase it in your fifties or early sixties—well before you need it. The cost rises as you age and may not be available if you develop certain medical conditions.
For more information, contact Merrill Lynch Financial Advisor Terri E. Jones of the Hunt Valley, MD office at 410-527-7756 or [email protected], or www.fa.ml.com/terrijones.
This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice.
All annuity contract and rider guarantees, or annuity payout rates, are the sole obligations of and backed by the claims paying ability of the issuing insurance company. They are not obligations of or backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.
Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.
U.S. Treasury inflation-indexed securities are subject to interest rate risk. If interest rates rise, the market value of your Treasury investment will decline. While you may be able to liquidate your investment in the secondary market, you may receive less than the face value of your investment.
Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and other subsidiaries of Bank of America Corporation.
Merrill Lynch Life Agency Inc. (MLLA) is a licensed insurance agency and wholly owned subsidiary of BofA Corp.
Investment products offered through MLPF&S and insurance and annuity products offered through MLLA:
Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value
Are Not Deposits
Are Not Insured by Any Federal Government Agency
Are Not a Condition to Any Banking Service or Activity
MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
© 2017 Bank of America Corporation. All rights reserved. ARBBW6XQ
You cannot control unexpected events in your life and the markets, but these tips from
Merrill Lynch Wealth Management can help you limit their impact.
Some common retirement mistakes—like overspending, investing too conservatively or veering away from your plan—are easy to avoid with a little discipline and forethought. Other risks—like a health crisis or a market downturn—cannot be avoided, but they can be managed. Here are four of the most common dangers to your retirement strategy, and steps you can take to prepare for them.
1. OUTLIVING YOUR MONEY
Thanks to medical advances and healthier lifestyles, Americans are living longer than ever. That is great news, but it also creates the very real possibility that you might outlive your retirement assets—especially when 37% of retirees underestimate their own likely lifespan by five years or more, according to a 2015 study by the Society of Actuaries.
“People look at how long their parents or relatives lived. But life expectancies have grown markedly from one generation to the next,” says Nevenka Vrdoljak, director of Retirement Strategies at Bank of America Merrill Lynch.
What You Can Do:
Think about delaying the age at which you claim Social Security. “By claiming at age 70 as opposed to 62, your monthly income goes up by 76%,” says Vrdoljak. Though you sacrifice income early on, knowing you will have higher Social Security payments in your seventies and beyond is like having “longevity insurance,” she adds.
Find out whether an annuity might be appropriate for you. Investing in a lifetime income annuity could help you avoid the risk of outliving your retirement savings by providing a path to income for as long as you live. Because annuities come with certain costs and risks, be sure to talk to your advisor about all the pros and cons before making a decision.
2. CHANGES IN MARKETS
If there is a significant market drop shortly before or early in your retirement—just as you are starting to tap into your assets—the value of your investments could shrink to an extent that undermines your retirement security. Even if the market subsequently improves, “If the first four or five years of your retirement are bad, it can be difficult to recover,” Vrdoljak says.
What You Can Do:
Take a second look at the way you invest. As you near retirement, shifting to a more conservative investment approach may help protect against market downturns. At the same time, it is important to maintain some exposure to stocks to create a suitable balance.
3. INFLATION
Although quite low in recent years, inflation—even a modest percentage—reduces your spending power over time. People living in retirement are especially vulnerable. Over a 25-year period—probably a reasonable expectation for the length of your retirement—a relatively low inflation rate of 2.5% can bring the value of every $100,000 saved down to about $54,000, according to calculations by Merrill Lynch.
What You Can Do:
Consider investments that could grow along with inflation. “That might be real estate or shares of stocks,” Vrdoljak says. If you have bond holdings, you may want to consider adding some Treasury Inflation-Protected Securities (TIPS). These government bonds offer returns that vary with the inflation rate. When interest rates go up, bond prices typically drop, and vice versa. “If inflation accelerates for whatever reason, you get compensated for that,” Vrdoljak notes.
4. RISING MEDICAL EXPENSES
“When it comes to financial planning, people do not systematically plan for health care risks,” Vrdoljak says. According to the U.S. Department of Health and Human Services, almost 70% of Americans over 65 will at some point need long-term care—which can include not just residence in a care facility, but help with daily activities like bathing or assistance with household chores. Even without such costs, it is likely that your health spending will increase as you age—and it is important to note that Medicare does not fully cover these costs.
What You Can Do:
Plan early for long-term care. Some people may be able to pay for out-of-pocket long-term care or are able to rely upon grown children or a relative for assistance. But for many others, long-term care insurance may be the answer. If you do choose long-term care insurance, try to purchase it in your fifties or early sixties—well before you need it. The cost rises as you age and may not be available if you develop certain medical conditions.
For more information, contact Merrill Lynch Financial Advisor Terri E. Jones of the Hunt Valley, MD office at 410-527-7756 or [email protected], or www.fa.ml.com/terrijones.
This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice.
All annuity contract and rider guarantees, or annuity payout rates, are the sole obligations of and backed by the claims paying ability of the issuing insurance company. They are not obligations of or backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.
Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.
U.S. Treasury inflation-indexed securities are subject to interest rate risk. If interest rates rise, the market value of your Treasury investment will decline. While you may be able to liquidate your investment in the secondary market, you may receive less than the face value of your investment.
Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and other subsidiaries of Bank of America Corporation.
Merrill Lynch Life Agency Inc. (MLLA) is a licensed insurance agency and wholly owned subsidiary of BofA Corp.
Investment products offered through MLPF&S and insurance and annuity products offered through MLLA:
Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value
Are Not Deposits
Are Not Insured by Any Federal Government Agency
Are Not a Condition to Any Banking Service or Activity
MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
© 2017 Bank of America Corporation. All rights reserved. ARBBW6XQ
~Copa