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Bradford M. Walker, CFP®
Senior Vice President
Wayne Hummer Investments

Over the past few decades much has been written about saving, investing, and asset accumulation. Recently, thanks to aging baby boomers, focus has shifted to the distribution phase of personal wealth management. For near and current retirees, it is important to understand and plan for the new risks associated with this phase of investing. During retirement, there is no extra time to recover from costly mistakes.

Personal Risk
Risks that are out of your control, such as your longevity and healthcare costs, can devastate an investment plan during retirement if you are not adequately prepared. In general, life expectancy and healthcare costs during retirement are unknown and uncontrollable variables.

Today there is a 50% chance that if both spouses reach the age of 65 at least one will live to age 90. Saving and investing is simply not enough; however, risks can often be reduced with proper planning. For example, the implementation of a guaranteed lifetime income stream for a portion of future income, or including long-term care insurance in your overall financial plan may be more valuable to the preservation of a family’s personal wealth than an investment-only approach.

Market Risk
During retirement, market risk can be thought of as consisting of two types: inflation risk and sequence of returns risk. Similar to the personal risks discussed above, future inflation rates and estimates of investment returns are also relatively unknown and uncontrollable variables. It is important to guard against these risks because during the retirement years there is less time to adjust and recover.

For retirees on a fixed income, ignoring inflation risk could prove disastrous. For example, at just a 3% inflation rate, a 60 year-old will need twice as much money at age 84 to maintain the same buying power he has today. One way to keep pace with inflation-adjusted income requirements is to include investments in your portfolio that generate rising income. Real estate and dividend paying companies are also often included in retirement income planning to address this risk.

Sequence of returns risk is the risk associated with market declines in the early stages of retirement. The sequence of returns does not adversely affect investors during the accumulation phase as it does in retirement. In retirement, if money is withdrawn when the market is down, the portfolio will not completely recover because there are fewer dollars to participate in a rebound. This can greatly decrease the number of years a portfolio can provide income. There are many ways to protect a portfolio from this risk. One example is through use of an insured annuity and by also implementing an effective Social Security income strategy.

It is crucial to understand these retirement investing risks to ensure the highest probability of successfully managing investments during the retirement distribution phase. Contact a Wintrust Wealth Management professional who can assist you in exploring strategies and products and help determine what plan is best to meet your unique retirement objectives.