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Five Key Risks (to your retirement nest egg)
Last Updated: May 08, 2015
You know how much is at stake as you set aside money for your future. You understand that retirements don’t just happen, and you are willing to make small sacrifices now so you can enjoy a more fulfilling retirement later. The problem is, unless your action plan includes strategies to address Five Key Risks, that nest egg you’re working so hard to build up may not be enough.
Here are Five Key Risks to your retirement nest egg and how to address them
- Inflation Investing too cautiously may actually be exposing you to a significant amount of risk – the risk of inflation eroding the value of your savings. And the longer you have to invest, the more that inflation could potentially become a serious problem. You need to earn enough on your money to keep up with inflation. Make sure your mix of assets includes an appropriate amount of stocks, which can outpace long-term inflation, without too many low-yielding assets like money market accounts, which might not keep up.
- Overconcentration Another risk to your retirement nest egg is overconcentration, putting too much of your money in one area of the market. The problem is, if all your eggs are in one basket, what happens when the bottom drops out of that basket? Diversification is the answer to overconcentration. Spread out your money in a variety of investments and asset classes. When one drops in value, another one might rise, smoothing out the volatility and lowering the level of risk.
- Volatility But what if the whole market goes down in value? Asset allocation, considered by many to be the most important factor in investing, is the answer. Allocating your assets effectively means more than just putting your money in a variety of funds. It means positioning your money in a way that fits you and your life situation. Take into account both your risk tolerance and time horizon. Complete a Risk Tolerance Questionnaire to determine your investing style. Then make sure your money is invested appropriately for someone your age who can tolerate that level of risk. If asset allocation models are available, use them to help you see how other investors in a similar situation might position their money so it has more potential to grow without more risk than you can handle.
- Medical Expenses Medical costs can quickly erode retirement savings. According to a 2014 study by Fidelity Benefits Consulting1, a 65 year old couple retiring this year will need $220,000 to pay for medical expenses throughout retirement, not including nursing-home care. That’s why adequate health insurance is so important. Educate yourself about Medicare and Medicare Supplement insurance options well before turning 65 so you can sign up for the coverage you need.
- Longevity People are living longer today than ever. A married couple at age 65 faces nearly a one-in-five (18%) chance that at least one of the two will live to age 952. Are you confident your money will last as long as you will?
