Retirees face several real risks with regards to their fears about running out of money: longevity is the biggest risk (living too long). Other risks are: market volatility and inflation, to name a few.
Longevity: This is probably our biggest risk. We are living longer. Many boomers are going to see their 90s, and more than a few, their 100s! Every other risk that I will be discussing gets compounded by living long. If you died tomorrow, no risks matter. But if you do see your 90s or 100s, then market volatility and inflation become more and more problematic.
Market volatility: Simply put, market volatility means, the ups and downs of the markets; and thus the ups and downs of your portfolio. In the past 15 years, we have seen more volatility than the previous generations (except for the Great Depression generation). One of the financial principles that I teach my clients is, don’t spend money from a declining asset. In other words, don’t use money from your portfolio in a bear market. It will deplete the asset very quickly.
Inflation: This is a no brainer. Since the 2008 market crash, the Feds have held interest rates at record lows, but this is beginning to change. I believe that interest rates will begin to climb soon, and when they do, the costs of just about everything will go up. We sometimes use the price of a McDonald’s hamburger as our guide. How much does a double cheese burger cost? Not long ago it was a buck. Now it is $1.29. What will it be in 10 years? INFLATION can really drain a portfolio that can’t keep pace with rising costs.