Slideshow The 5 Biggest Threats to Your Clients’ Retirement Nest Eggs

  • January 18 2012, 2:18pm EST
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The 5 Biggest Threats to Your Clients’ Retirement Nest Eggs

Financial planners know all too well how difficult it can be to get their clients motivated enough to make the sacrifices and investment decisions that are necessary to ensure a comfortable retirement.

In fact, according to a recent ING Retirement Research Institute study, 71% of Americans – regardless of age – still lack a formal investment plan to help them reach their retirement goals. And the latest Retirement Confidence Survey from the Employee Benefit Research Institute found that more than half of all respondents are either “not at all” or “not too confident” that they’ll be able to afford the retirement and lifestyle they desire once they’re done working.

This reality is keeping far too many Americans up at night, worrying about an uncertain economic future at a time when they’re living longer, retiring later and – most disturbing for many – have seen the value of their homes plummet virtually overnight.

But what about those clients who have done everything right?

They’ve been working with a financial planner, contributing to their 401(k)s, maybe have a pension in the offing, are saving money at a decent clip and are following the sound investment advice offered by the professionals but, according to Fidelity Investments, there's still a good chance they might not have enough put aside to live out their golden years in style.

Here’s an interactive slide show detailing five of the biggest threats to even the most well-prepared investor's retirement plan.

Source: Fidelity Investments

5. Withdrawing Too Much From Savings<br><br>

Drawing down your savings too rapidly can also put your retirement plan at risk. This risk can be magnified further if a sustained market downturn—similar to the one in 2007-09—occurs early in retirement. Retirees should consider using conservative withdrawal rates, particularly for any assets needed for essential expenses.

Fortunately, you have control over how much you withdraw and can adjust it based on circumstances.

Consider keeping your withdrawals as conservative as you can. Later on, if your expenses drop or your investment portfolio grows, you may be able to raise that rate.

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4. Failing To Position Investments For Growth<br><br>

A too-conservative investment strategy can be just as dangerous as a too-aggressive one. It exposes your portfolio to the erosive effects of inflation and limits the long-term upside potential that diversified stock investments offer. On the other hand, being too aggressive can mean undue risk in down or volatile markets. What can help: a strategy that seeks to keep the growth potential for your investments without too much risk.

Consider creating a diversified portfolio that includes a mix of stocks, bonds, and short-term investments, according to your risk tolerance, overall financial situation, and investment time horizon. Doing so may help you seek the growth you need in a way that lets you sleep at night. But remember that diversification/asset allocation does not ensure a profit or guarantee against a loss.

3. Being Caught Unawares By Inflation<br><br>

Inflation can eat away at the purchasing power of your money over time. This affects your retirement income by increasing the future costs of goods and services, thereby reducing the purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree’s purchasing power. For example, $50,000 today would be worth only $30,477 in 25 years, even with a relatively low 2% inflation.

Some retirement income sources, such as Social Security, some pensions and variable annuities can help you keep pace with inflation automatically through annual cost-of-living adjustments or market-related performance. But others, such as fixed pensions and annuities or fixed-income investments, can’t.

Consider investments that have the potential to deliver inflation-beating returns. Among the choices: growth-oriented investments (individual stocks or stock mutual funds, for example), Treasury Inflation-Protected Securities (TIPS) and commodities.

2. Underestimating How Long You Will Live<br><br>

As medical advances continue, it’s quite likely that today’s healthy 65-year-olds will live well into their 80s or even 90s. This means there’s a real possibility that you may need 30 or more years of retirement income.

An American man who’s reached age 65 in good health has a 50% chance of living 20 more years to age 85, and a 25% chance of living to 92. For a 65-year-old woman, those odds rise to a 50% chance of living to age 88 and a one in four chance of living to 94. The odds that at least one member of a 65-year-old couple will live to 92 are 50% and there’s a 25% chance at least one of them will reach age 97.

Without some thoughtful planning, you could easily outlive your savings and have to rely solely on Social Security for your income. Chances are, like many people, you don’t have a company pension to rely on – only 30% of Americans today have one. And with the average Social Security benefit of just over $1,000 a month, it likely won’t cover all your needs.

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1. Failing To Prepare For Spiraling Health Care Costs<br><br>

With longer life spans, medical costs that are rising faster than general inflation, declining retiree medical coverage by private employers, and possible funding shortfalls ahead for Medicare and Medicaid, managing health care costs can be a critical challenge for retirees.

According to Fidelity’s annual Retiree Health Care Costs Estimate, a 65-year-old couple retiring in 2011 will need more than $235,000 to cover health care costs during their retirement. And that is just using life expectancy data – many people will live longer and have higher costs. Since Fidelity started the annual estimate in 2002, estimated costs have increased by 6% a year.

That cost doesn’t include possible long term care (LTC) expenses. About 70% of those over age 65 will require some type of LTC services – either at home, or else, in adult day care, an assisted living facility, or a traditional nursing home. The average private-pay cost of a nursing home is about $70,000 per year and exceeds $100,000 in some states. Assisted living facilities average $34,000 per year. Hourly home care agency rates average $46 for a Medicare-certified home health aide and $19 for a licensed non-Medicare-certified home health aide.

Consider earmarking a portion of savings for health care and purchasing long term care insurance. The cost is based on age, so the earlier you purchase a policy, the lower the annual premiums.

Also see: 12 Terrifying Retirement Facts Keeping Boomers – And Their Advisors – Up At Night