Risk in Retirement, Part 1: Will I Run Out of Money in Retirement?

Will I run out of money in retirement?

As an advisor, we are asked this question more often than anything else, although it’s not always worded this way. 

“When should I claim Social Security? What’s the best tax strategy in retirement? How long should I keep working? Should I get long-term-care insurance?”

At their core, all of these questions come down to the same basic concern: Will I run out of money in retirement?

We recently asked our clients to identify their top three financial concerns, and out of 12 choices, “running out of money in retirement” was far and away the top choice, chosen by more than 50% of respondents.

When it comes down to it, this question is fundamentally a question of risk, so hold onto your hats, because in case you don’t know this about me yet, I am a huge risk nerd. I love to think (and talk) about risk: what goes into it, what it means and what to do about it. So get ready, because… it’s about to get real (risky).

Here’s the deal: It’s impossible to completely avoid risk, but we can be strategic about how we approach risk. The key is to focus on what we can control and how those levers impact the risks that we’re facing. 

So let’s breathe out a quick Serenity Prayer and dig into how we can tackle a few of the inescapable risks of retirement – without living in constant fear of draining your life savings.

Risk is Everywhere

Risk is present in pretty much all of life, and retirement is no exception. The biggest risk on people’s minds when it comes to retirement planning is often whether they will run out of money beyond their working years.

It’s not surprising. Running out of money when you can no longer work to earn a salary is an anxiety-inducing prospect. The likelihood of it happening is probably lower than we think, but our brains play tricks on us to make us think otherwise. Researchers have found that the worse the outcome, the higher the likelihood we unconsciously assign to it. 

Think of it like flying: The chance of dying in a plane crash is minuscule (1 in 11 million), but my mind still jumps to “We’re going down!” every time the slightest turbulence occurs. Compare that to the odds of dying in a car crash (1 in 5000), yet I rarely think twice about jumping in my car to drive somewhere, 

Two components of risk that you can control

Don’t believe anyone that tells you they can guarantee you a risk free retirement. That’s not possible. Chasing that risk-free feeling can actually sometimes expose you to more risk, or to different types of risk that are more unfamiliar. 

For example, it may feel risky to invest your money and safer to leave it in cash. However, over the long term this “safe” cash strategy could actually be riskier for your retirement because your cash loses purchasing power as it sits stagnant while the cost of living increases due to inflation. The longer the horizon, the bigger the risk we face with cash, and the lower the risk we face with investing.

Being strategic about risk is as much about how you think about risk as it is your actions. 

To keep things in perspective, it’s important to focus on what we can control. To understand this more let’s think about what actually makes something “risky” by breaking it down. 

Risk is made up of two main components:

1. A potential bad outcome

The easiest analogy here is driving: Every time you get in the car, you face the risk of getting in an accident – there’s no way around it. But there are multiple things you can do to limit how bad an accident will be by wearing your seatbelt, driving a car with a high safety rating, avoiding high-speed roads, etc. 

So when we think about the things we can control about this aspect of risk, we want to think about things that will decrease the severity of the bad outcome

2. Uncertainty about whether the bad outcome will occur

Where there is uncertainty, there is also probability, which is the best way to think about this risk factor. What is the probability, or likelihood, of this bad outcome occurring? More importantly, what can I do to lower the probability of this bad outcome occurring?

Going back to the car analogy, you also have tactics you can use to lower the probability of getting in an accident: Mind the speed limit, avoid aggressive drivers, not make emotional decisions, not drive during snowstorms, drive when it’s bright outside, etc.

You can’t completely eliminate risk, but you can make a plan for the future to minimize risks and set yourself up for success in retirement. Talk to your financial advisor about risks you’re most concerned about, which factors you can control and how to best move forward for your retirement goals.

Learn More with Clarity

Let’s talk about risk management – click here to schedule a complimentary consultation with a Clarity advisor today.

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