How Longevity Has Changed Retirement and the Meaning of Reasonable Risk
People are living longer, and that may be a blessing, but when those same people don’t apply that fact to their retirement plan, it can be a disaster. Many don’t think about those extra years – when you celebrate a longer retirement, your finances have to last along with you, changing the definition of retirement and what reasonable risk means later in life.
Increased Performance
If you retire at age 65 and plan to live well into your 90s, your assets have to produce income, retain their purchasing power and preserve principal for 30 years. That’s 30 years of inflation, recessions, healthcare increases, stock market dips, interest rate changes, global economics, political changes, Social Security and the national debt. Are you prepared and will your money last?
It’s important to discuss your life expectancy with an accredited financial advisor. Ask him or her what an extended retirement will do to your finances later in life and how that changes your reasonable risk. Your days of taking investment risk to produce higher returns may not be over as soon as you thought.
While longevity can be a wonderful thing, it creates two new retirement risks:
- Becoming too conservative too soon
- Following bad advice when you invest to improve performance
Investment risk tolerance still declines with age, but retirees must also ensure they don’t run out of money late in life when they need it the most. Talk with a financial advisor about what reasonable risk will mean during your early retirement years. You may need to consider the performance of your assets for a longer period of time than your parents or grandparents may have had to.
Future retirees who are solely responsible for their own results will have to take more risk because they need higher performance to offset the four primary types of erosion that impact retirement assets:
- Investment expenses (deductions from your accounts)
- Inflation (reduces the purchasing power of your assets)
- Taxes (dividends, interest, gains, distributions)
- Distributions (if retired and taking money out of accounts)
How you plan to spend your retirement also makes a difference.
Stock Market Crashes
Unfortunately, future stock market crashes – and bear markets – are inevitable. But what can be most worrisome for current and future retirees is the number of years it takes to recover from a crash. Nobody has a crystal ball that can predict when the next crash will occur or why, so working with a financial fiduciary who will put your interests first when creating your retirement plan is beneficial.
The worst-case scenario is a stock market crash the year you want to retire. In a short period of time, your assets could decline in value by up to 40 percent, and you’ll have no quick way to recover losses and still be able to retire when you want to. You must accumulate enough assets to survive crashes and still achieve your retirement goals.
Total Return Investing
While retirees used to often limit their investing to bonds only, to avoid the volatility of the stock market, today’s low interest rates have made this strategy obsolete. Now, retirees invest in the stock and bond market for the following reasons:
- They have a more than 30-year investment horizon
- Stocks outperform bonds over longer time periods
- Retirees need higher returns to offset erosion
- Retirees need a reinvestment amount to grow their assets
Performance is the primary method of growing assets and preserving their value.
Wall Street Myths … And Realities
There are two common myths that salespeople often use to push investment and insurance products. (Be aware, as these myths often sound real when presented by a personable “advisor” who has strong sales skills.)
1. Someone who uses the title “financial advisor,” must hold a certain level of experience and education.
Unfortunately, this is false. The truth is, there are no requirements – not even possessing a high school diploma – to call yourself a financial advisor. In fact, most “financial advisors” are not advisors at all. Instead, they are licensed sales representatives who masquerade as financial experts. Typically, these salespeople just use the title of financial advisor or financial planner to increase their chances of selling an investment product or service that will provide them with a hefty commission.
Misrepresentation is one of the reasons Paladin Registry offers free resources and fact-checking services for investors. Falling for one of these clever sales tactics can be devastating for an investor long-term. When searching for a financial advisor, make sure you check all credentials listed after an “advisor’s” name. It’s easy with this complimentary Check a Credential service.
2. Your interests always come first.
Wall Street firms and sales representatives often make this claim in their sales pitches because they know this is what an investor wants to hear, but in many cases, it’s a false promise.
The only way to know if your interests are actually being put first is if an advisor follows the fiduciary standard. Otherwise, major conflicts of interest may exist.
When looking for a financial advisor, be aware of Paladin’s red flags that often mean an “advisor” is just a salesperson. You may think you hired a financial advisor to help you accumulate and preserve retirement assets, but in fact, he or she is a salesperson with no experience in the financial services field. Hiring a financial advisor is the most important decision you will make for your financial future. Don’t skimp on your research.
The Danger of a Sales Representative
Longevity makes working with the wrong financial advisor even more dangerous. (If you need to terminate your current financial advisor, here are some tips.)
Reasonable risk should be discussed with a financial advisor who has taken your goals in retirement and your life expectancy into consideration.
Here are 3 reasons why a sales representative can be most dangerous to your retirement and your future:
- They are usually paid commissions by third parties.
- Many times, they do not provide ongoing advice and services.
- Salespeople are not accountable for the performance of their recommendations.
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