Retirement income planning: weighing the risks

Miami's Community Newspapers
John O’Rourke

When it comes to planning for your retirement income, it’s easy to overlook a few common factors that can affect how much you’ll have available to spend. Let’s take a look at the more significant ones.

Different types of investments carry with them different risks. Sound retirement income planning involves understanding these risks and how they can influence your available income in retirement. Investment or market risk is the possibility that fluctuations in the securities you hold may result in the reduction and/or depletion of the value of your retirement savings. If your retirement plan includes withdrawing funds from these types of investments, you’ll want to make sure you’re prepared to handle down markets or you run the risk of depleting your savings far sooner than you had planned.

Reinvestment risk is typically associated with fixed rate investment vehicles such as bank certificates of deposit or bonds. When an instrument matures, there’s the risk that comparable instruments may not be paying the same return anymore. This could mean that you have to either reinvest at a lower rate of return or take on additional risk to maintain the same rate of return.

Interest rate risk occurs when interest rates rise and the prices of other existing investments drop. For example, consider bond yields (aka coupon rates) which move in the opposite direction of interest rates. In a rising interest rate environment, like the one we’re experiencing now, new bond issues will likely yield higher coupon rates than the older ones. Additionally, some investors may decide to move monies out of stocks and mutual funds and into “lower-risk” fixed rate investments paying higher interest rates than in years past.

It’s important to outpace inflation and have a sound strategy in place which allows your income stream to grow throughout retirement. Consider this, over the years inflation has historically averaged three percent annually. This means that one dollar today will only buy half as much 23 years from now. In order to maintain the dollar’s strength, its purchasing power, you’ll need to make sure your investments average a return of at least three percent.

The effect of taxes on your retirement savings and income is often overlooked. It’s important to understand how the income generated from your investments is taxed and subsequently factored into your financial plan. Failing to plan properly can result in unforeseen taxes eating into your income and significantly reduce the amount you have available to spend in retirement.

Your financial planner, insurance specialist, accountant and attorney are key players when it comes to preparing properly for retirement. Bringing them into the discussion early on will help to ensure you enjoy the retirement you envision.

John O’Rourke is First American Bank’s Private Banker and Wealth Advisor for South Florida. As a relationship manager for high net worth individuals and their companies, he assists clients and family members with a variety of banking and wealth advisory needs. If you have any questions or comments, contact John at

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