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6 Biggest Risks in Retirement Planning

Wednesday, 17 June 2015 03:01 PM

Even the best laid plans can go awry in planning for retirement. Catastrophe, debt and fraud are among the factors that can derail a carefully laid plan. Being aware of the risks and planning accordingly can help lessen the blow.

Here are six of the biggest risks in retirement planning.

1. Longevity
We all want to "live long and prosper," to borrow the familiar phrase from Star Trek, but in retirement it's possible that one comes without the other.

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"Retirees do not know how long their retirement will last," Forbes contributor Wade Pfau wrote, "and so they face a delicate tradeoff between wanting to spend as much as possible without overdoing it and triggering old age poverty."

As life expectancies rise, experts say it's prudent to plan for at least 20 years past retirement, and save, invest and spend accordingly.

2. Catastrophe
Economic calamity can take many forms: A costly illness or accident that dramatically impairs your earning capacity and creates a financial draw; or a financial collapse, as occurred in 2008, that devastates household worth and can affect retirement-savings accounts, sometimes just as retirees are nearing the end of their careers.

3. Imbalance
Insurance can help blunt the financial effects of unforeseen personal disasters. For defending against financial forces beyond an individual's control, a diversified retirement portfolio is essential. Finding an optimal balance between equities and fixed income securities — stocks versus bonds, respectively — is about hedging against sharp downturns while getting the most yield from a retirement account. Likewise, striking a balance between retirement income that's tax-exempt versus tax-deferred will also make for a more secure retirement.

4. Debt
Accumulating unnecessary household debt creates a headwind against the growth of your retirement investment accounts. Ordinary inflation is one thing, but retiring while you're still carrying interest-bearing credit card debt is one sure way to deplete your limited income. It's difficult enough to out-earn your interest burdens while you're still in the workforce and bringing in new money; expecting that the interest on your retirement savings will outpace credit-card interest and fees is pure folly.

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5. Fraud
The risk of being victimized by financial fraud may be small, but you ignore it at your peril. The IRS reports that at the company-wide level, investment losses reported by employee retirement plans often come down to weak internal controls for managing retirement plans, and costly gambles on risky or opaque investments.

6. Ignorance
Individual investors with responsibility for their own retirement planning can find themselves at a severe disadvantage. The more educated you become about how financial planners work and what they're paid to do, the more you can trust in your judgment about who to hire.

"You want to know how the incentives work, for you or against you," Casey Mervine, a vice president and senior financial consultant at Charles Schwab, tells Bankrate.

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Even the best laid plans can go awry in planning for retirement. Catastrophe, debt and fraud are among the factors that can derail a carefully laid plan. Being aware of the risks and planning accordingly can help lessen the blow.
retirement, biggest risks
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2015-01-17
Wednesday, 17 June 2015 03:01 PM
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