Risk 1: Healthcare Costs
You’re a firefighter – you’ve been doing backbreaking work in dangerous environments for possibly decades. The thanks you get – a higher chance of cancer, respiratory illnesses, and heart disease. On top of that, you usually retire earlier, potentially leaving a gap in coverage before Medicare kicks in. Your average American is faced with spending $315,000 in healthcare in retirement. As a firefighter, you might expect to pay even more.
While pensions and health benefits provide some coverage, they may not fully protect against the rising costs of healthcare, specialized treatments, or long-term care that could be required due to job-induced health conditions. It’s incredibly critical to choose the optimal health insurance plan – one that carefully balances your expected healthcare costs and premiums.
Unfortunately, due to the heightened risk of deadly diseases, firefighters are more likely to pass away at an earlier age. A premature passing not only results in emotional loss but also the loss of a breadwinner, which can have devastating financial implications for the family left behind. So it’s essential to have the proper life insurance in place to ensure your family is well provided for if the worst were to happen. It helps ensure that your family’s financial needs—such as daily living expenses, education costs, and outstanding debts—are taken care of despite your absence.
Risk 2: Inflation Risk
Do you ever look around at the store and wonder how things got so expensive in the world? When you were just starting your career, things really did cost much less – but you also earned less. So, as long as your earnings go up, inflation usually doesn’t hit you too hard. However, in retirement, you stop getting pay raises and promotions. Instead, it’s a battle of inflation against your dollars, and they’re nearly defenseless.
Even at moderate rates, inflation can severely diminish the purchasing power of your retirement savings over time.
Let’s say you have a million dollars in savings on the eve of your retirement and you’re going to withdraw $50,000 a year to live off of. What does that $50,000 look like after 15 years? Using just an average inflation rate of about 3%, you’ve already lost nearly $18,000 in purchasing power. You planned your costs and lifestyle around $50,000 a year – can you afford to live off of $32,000 instead? And what if inflation went rampant like it did in 2022?
To mitigate the effects of inflation, you need to either invest in assets that consistently outpace at least the average inflation rate or purchase a product that provides a guaranteed return adjusted for inflation, such as an annuity.
Risk 3: Asset Allocation Risk
Unless you’ve taken steps to eliminate the Windfall Elimination Provision, you’re unlikely to receive Social Security benefits in retirement, which could be a blow to your retirement. Considering your pension probably won’t cut it, investing in the stock market from early on is perhaps the best bet to help ensure you have enough savings in retirement. In fact, Fidelity states that 62% of retirement income will come from personal investments. You shouldn’t and can’t depend on anyone else for your retirement.
However, one mistake many investors make is converting too much of their savings from stocks to bonds too early, effectively slamming the brakes on their portfolio growth too soon. And that’s understandable because as the markets give, they also take away just as quickly.
But since you’re facing a long retirement, you may have plenty of time to let your stock returns catch up if you do get hit with poor returns – as long as you don’t withdraw too much.
Risk 4: Market Volatility
As hinted at above, the flip side of asset allocation risk is the chances of the stock market crashing or having a series of bad years right when you begin your retirement withdrawals. We know the stock market will recover, but will it recover in time to give your savings the boost they need to last 25 to 30 years? This risk is also called a negative sequence of returns, and it can quickly wipe out your savings.
Remember the stock market crash of 2008? How many people on the verge of retirement had to continue working, and how many retirees suddenly saw their savings dwindle to a fraction of what it was before? Fortunately, the markets saw a big jump in 2009; however, another negative year would have had disastrous consequences. Let’s just take three years of negative returns from a $1,000,000 nest egg with a 6% withdrawal rate.
Even with many positive years worked in, you would run out of money after thirteen years.
You could constantly adjust your withdrawal numbers according to market returns so you’ll never technically run out of money, but your lifestyle will drastically change accordingly. You need a delicate balance of stocks that will power through inflation, yet enough in bonds or other risk-averse investments to prevent a total loss of your savings.
Risk 5: Longevity Risk
Besides the possibility of leaving your loved ones without a primary breadwinner, most of the issues detailed above don’t have much of an effect on your retirement if you don’t have a long retirement. However, each issue exponentially increases in its effects the longer you live. Once you get past that year 25 mark, you’ve probably lost half of your savings only to inflation, which will only worsen. The longer you live, the more health problems and costs you will have. Each year, you need to withdraw from your savings, and the chances of running out go up the longer you live.
Technology is advancing at blinding speeds. So, while firefighters face early mortality rates compared to other professions, there is still an outstanding chance that you’ll live past the average life expectancy. So, don’t plan on a short retirement – plan on a long one. Easier said than done, right?
As a firefighter, the cards are stacked against you. With healthcare costs historically rising at an average of 5.4%—surpassing the inflation rate of 3.8% between 1960 and 2022 — your health and finances are at risk. Negative market returns can significantly diminish your savings and lead to you running out of money early – but you need the potential of high market returns to outpace inflation and offset annual withdrawals as much as possible. People are living longer and longer, so your savings need to last accordingly. Putting it all together seems like an overwhelming task. Oh, and we haven’t even gotten to taxes yet!
So what is the solution? Of course, there isn’t any one-size-fits-all, quick fix. Each situation is unique, each family is unique, and every goal is unique. That’s why partnering with a team of financial professionals can help minimize each and every risk you face in retirement. Of course, there will still be risk – life is as unpredictable as the stock market – but with a comprehensive and deliberate approach and careful planning, you’ll be much better off than if you were to just hope for the best.
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