It feels like you're crossing a finish line when you finally retire, but statistics show you'll likely be in this phase for roughly 20 to 30 years. It's actually the beginning of a vibrant new chapter in your financial life. We know the shift from earning a steady paycheck to relying on your investments can feel daunting, but you aren't alone in navigating this transition.
Understanding the risks in retirement
You deserve to enjoy this time, so it's important to have a roadmap that accounts for potential bumps in the road. Whether it involves aging or broader economic changes, there are three specific risks we want to watch out for.
Longevity risk
This is the technical term for the fear of outliving your money. It's one of the main reasons why you should build a solid, balanced portfolio now. We want your money to last as long as you do, which requires thoughtful tax-efficient withdrawal sequencing as you age.
Market risk
This refers to the possibility of the stock market dropping dramatically. It can make financial planning challenging, especially if the market drops early in your retirement years. This early vulnerability is known as sequence of returns risk. Because market shifts are inevitable, a strong roadmap incorporates safe withdrawal strategies to account for this risk throughout your life.
Inflation risk
This risk attacks the value of your money over time. For example, if inflation averages 3.1% a year, the purchasing power of your cash drops significantly. Here's how that decline looks in practice:
| Timeframe | Purchasing power of $1 |
|---|---|
| Today | $1.00 |
| In 10 years | $0.73 |
| In 20 years | $0.54 |
It's vital to factor in these changes to your purchasing power when planning for the future.
How to reduce your financial risk
There are many ways to handle these risks, but a diversified approach is usually best. Many retirees use standard industry frameworks, like the 4% withdrawal rule or a 60/40 asset allocation split between stocks and bonds, to give their roadmap a solid foundation. Another popular approach is the bucket strategy, where you divide your assets based on when you need to spend them. Here's how different assets play a role in your overall strategy.
Cash provides liquidity
Whether it's in a savings account, money market account, or CD, cash provides the same benefit in retirement as it did before. It's a highly liquid asset that you can use for current expenses, serving as your immediate funding bucket.
Stocks offer growth
Stocks add the potential for long-term growth to your portfolio, though they carry some short-term risk. Some stocks also share the company's profits with you through quarterly payments called dividends. Holding equities helps combat inflation over a 20 to 30-year retirement.
Bonds bring stability
Bonds are a key part of your roadmap because they provide income and stability. They help your money react to the market differently than stocks do. During a significant stock market downturn, bonds may rise or fall only slightly. Conversely, when the stock market is roaring, bonds might lag behind. That's okay. You want the assets in your portfolio to balance each other regardless of how the overall market is moving.
The role of Social Security
Social Security was designed to supplement your other income sources in retirement rather than fund your post-work life completely. According to the Social Security Administration, as of May 2021, the average Social Security retirement benefit was about $1,543 a month, or about $18,516 a year.
Even folks who earn six figures and are collecting the maximum Social Security benefit, which was $3,895 a month in 2021, need more than Social Security to support themselves. This is why we encourage you to focus mostly on your balanced mix of cash, stocks, and bonds to create a sustainable withdrawal rate.
The Facet difference
At Facet, we believe that how you use your money is a reflection of your values. Navigating retirement requires objective guidance to balance growth and safety without the conflict of product sales. You'll work with a CFP® professional to build a comprehensive financial roadmap for a transparent, flat membership fee. We focus on providing straightforward, informational support so you can approach the next 20 or 30 years with calm confidence.
