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Five Risks to Your Retirement Income

After working to thoughtfully plan and save for retirement, it's important to have a strategy for generating a secure, sustainable income stream in retirement. There are a number of challenges that you might face in doing so; however, a little careful preparation can help you overcome the risks and put you on the path to a better retirement.

The primary risks to sustainable retirement income, which are discussed in more detail below, are:

  • Number of years your retirement income will need to last
  • Inflation's ability to erode your savings
  • The rising cost of healthcare
  • Uncertainty of the markets
  • Withdrawing too much too quickly

Risk 1: Living longer

Life expectancy in the U.S. continues to rise. On average, life expectancy for a child born in 2014 is 78.8 years old. For those who live to age 65, they might expect to live an average of 19.3 more years. What does that mean to you? It may mean planning to save enough to sustain you through a 20-year (or longer) retirement.

Risk 2: Inflation

Inflation describes the rising costs of goods and services and the decline in the purchasing power of money. Over the last 50 years or so, U.S. consumer inflation has averaged about 3% to 4%. If inflation continues at that rate, a car you purchase in 2017 for $25,000 would cost more than $54,000 just 20 years from now. Inflation is silently eating away at your savings, even though you can't see it happening. Therefore, you may want to consider whether your investment strategy takes into account the effects of inflation.

Risk 3: Health care

The cost of health care in retirement can be a shock to many retirees. In fact, the Employee Benefit Research Institute (EBRI) estimates that a married couple may need approximately $265,000 to cover health care costs. Watch this video about how other retirees have handled health care expenses‡.

Risk 4: Market volatility

A sudden downturn in the market may have a significant impact on your retirement savings if you aren’t well diversified or don’t have time to wait out a market recovery. When creating your retirement plan, consider the impact a volatile market could have on your savings. You may be in retirement 20 or 30 years and the market could fluctuate dramatically during that time.

Risk 5: Excess withdrawals

How much of your savings you can safely spend each year depends a lot on how much you have saved and other factors listed above. However, research has shown that retirees who start at a withdrawal rate of about 4% of their portfolios each year have a greater chance of their money lasting through retirement than those who withdraw a larger amount.

Knowing your risks and planning how you'll overcome them is an important facet to your retirement strategy. For help creating a plan, use the tools on the Wells Fargo website, or consider consulting a financial advisor who can discuss options that are realistic for you.