Ways to Shockproof Your Retirement Nest Egg

No matter how long we prepare for it, sometimes things just don’t work out for us once we reach our golden years. Living longer, health issues or the death of a spouse can lead to differences between the retirement we planned for, and the one we end up living.

According to a recent survey by the Society of Actuaries (SOA), 72 percent of current retirees report experiencing at least one financial shock so far in retirement.

“Too many new retirees take a ‘we’ll take care of it when it happens’ approach to planning. This mindset can be detrimental for retirement financial security,” said Anna Rappaport, Fellow of the Society of Actuaries. “Unexpected expenses, such as the death of a spouse or home repair, are often absent from retirement planning. The impact of these shocks is substantial and can reduce assets by 25 percent or more.”

Rappaport discussed with FOXBusiness.com ways you can shockproof your nest egg.

Boomer:  With Americans living longer, what can we do to ensure we don’t prematurely deplete our funds in retirement?

Rappaport:  Many Americans lack an understanding of the impact of longevity on retirement, which presents a financial barrier to effective retirement planning. The SOA’s survey found pre-retirees and retirees anticipate living to a median age of 85. However, actual average life expectancy is higher: 86.6 for a 65 year-old male and 88.8 for a 65 year-old female, according to the SOA’s mortality data.

The gap can have real implications on financial security for retirees, and underscores the importance of understanding and planning for longevity to mitigate the possibility of prematurely depleting retirement funds. Your financial advisor cans help set you on the right course.

Taking it a step further, the SOA also recommends planning for the longest time a retiree or spouse may live. This can differ from the average life expectancy, but planning to the average is the equivalent of planning to fail half of the time.

Boomer: What did the survey find on spending and debt management?

Rappaport: The SOA survey confirmed that decreasing and managing spending is a major focus of retirement risk management, and that debt affects pre-retirees and retirees differently. Nearly 60% of pre-retirees expect spending to decrease in retirement, which is generally consistent with what retirees experienced. Only 38% of retirees found their expenses in retirement to be higher than expected. To reduce costs, most retirees cut down on spending (90 percent), restaurants (70 percent), travel (56 percent) and gift or charitable giving (17percent).

Budgeting and financial management is especially challenging for consumers overseeing a limited retirement fund for an undetermined length of time, and it’s crucial to carefully manage spending to prepare for retirement.

Boomer: What is the impact of inflation on retirees’ financial stability?

Rappaport: Inflation can impact retirees in multiple ways, from increasing the cost of living on necessities like healthcare, food and lodging, to diminishing the value of retirement savings and investments. The SOA survey found inflation is met with varying degrees of concern. 76 percent of pre-retirees and 66 percent of retirees think inflation will at least somewhat affect the amount of money they need each year in retirement. But others are less concerned about the effect of inflation on their spending power in retirement, with 19 percent of pre-retirees and 29 percent of retirees indicating inflation will affect them only a little or not at all.

Inflation can impact all retirees, and the SOA recommends carefully planning to mitigate any negative financial effect on retirement savings. Healthcare cost inflation can be particularly difficult for retirees as many health insurance plans including Medicare are increasing the retiree’s share of the cost faster than inflation.  (And healthcare costs are rising more rapidly than costs in general.)