Retirement Black Swans
In light of the many ways that retirement finances can get untracked by unforeseen events, it may be appropriate for advisors to have a discussion with clients about creating a “Black Swan” bucket to fund the truly unexpected.
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Retirement Black Swans
A well-planned retirement contemplates the risks that could upend financial security in retirement. For the most part, a prudent, comprehensive plan incorporates these major, known risks, such as inflation, investment risk, sequence of returns risk, health care costs and longevity.
But what about other risks that could lead to crippling financial impact in retirement that aren’t so readily visible or well recognized? What are these risks, and can anyone sufficiently plan for them?
Top Retirement Risks Flying Below the Radar
Multiple Shocks to Retirement—A good retirement plan is built to withstand shocks: a bear market, property damage, etc. Fewer plans are built to survive multiple shocks over a three-decade period.
According to the Society of Actuaries, nearly 20 percent of all retirees and 24 percent of retired widows experience four or more shocks over the course of retirement, with each successive shock becoming harder to overcome.1
Gray Divorce—The rate of divorce for couples over the age of 50 has more than doubled in the last 25 years.2 A divorce in retirement has significant financial consequences as household expenses essentially double, while assets and income may get halved.
Overspending—For many people, managing their spending from paycheck to paycheck was difficult enough. In retirement, where more than 50 percent of income may come from investments and savings, the risk of overspending is high, especially during bull markets when wealth is growing.
Financial Market Black Swan—Markets can deal devastating blows to retirement assets. By definition, Black Swan events are those that no one sees coming; however, that doesn’t mean retirees shouldn’t plan for them in the form of diversifying into alternative assets, like gold or bitcoin, and transferring risk to insurance companies in the form of annuities.
Getting Frail and Aged—Of course, this is a foreseeable (and even likely) event in retirement, but some of the associated consequences are entirely ignored, like becoming a victim of financial elder abuse or losing cognitive abilities. Retirees can protect themselves against these risks by simplifying finances, creating a living trust, appointing a guardian in advance and executing a financial power of attorney.
New Financial Responsibilities—Paying for a grandchild’s college education or supporting an adult child through divorce are examples of unexpected events that retirement plans don’t anticipate, but to which most retirees would respond with financial assistance—even if it upends their own retirement security.
Considering the many ways that retirement finances can get untracked by unforeseen events, it may be appropriate for advisors to have a discussion with clients about creating a “Black Swan” bucket to fund the truly unexpected.
See referenced disclosure (2) at https://blog-dev.americanportfolios.com/disclosures/