We all have to go through life facing a variety of unknowns. Our goal, generally, is to integrate enough safety mechanisms that we can handle the unexpected events life sends our way. That’s certainly the goal when you create a portfolio filled with fixed products, variable products, and investments across various industries and timelines. By crafting this portfolio with both correlated and uncorrelated assets—so some benefit from market gains while others continue to grow even when the market takes a dive—you feel like you’re gaining a sense of security. The problem is, you’re still not gaining any guarantees.
It doesn’t matter how much money you save and how high that balance grows after you’ve invested it—if you don’t invest in products with a guarantee then there are no assurances you will have enough to handle all the financial needs you have after retirement. Worse, you have no way of ensuring that your funds will be able to outlast inflation and tax increases. Additionally, you may end up depleting assets you’d wanted to leave to heirs while trying to pay for long-term care costs, medical needs and living expenses.
In 2015, it was announced that the cost of living adjustment (COLA) for Social Security would not be happening in 2016. The reason behind this denial was that the Consumer Price Index, a measure of prices paid for goods, had been flat due to lowered gas prices. While lowered gas prices can make life cheaper for seniors, both by lowering their own gas expenses and dropping the price of products, there are no guarantees that it will do so. Worse, this denial of COLA shows that there are no guarantees we can even rely on the Social Security Administration to help you keep up with rising expenses.
You might plan on taking your postretirement income from your IRA or 401(k), but how do you know you will be able to do that throughout your lifetime? You could deplete your savings sooner than expected or end up losing money from bad investments or fixed investments with slow growth that are easily outpaced by inflation.
Retirees need guarantees. By investing in products such as life insurance or fixed indexed annuities, they can create guaranteed income for life and a fund guaranteed to benefit their heirs after they pass away.
In the next volume of the THREATS TO POSTRETIREMENT INCOME series, we’re going to talk about how liquidating investments that have low returns, or no returns, during the early years of your retirement can completely undermine your ability to create a comfortable, stable postretirement income.