Are you among the millions of American business owners who haven't saved enough for retirement? Whether you're banking on selling your business as your primary retirement asset or have other conventional investments such as an IRA, real estate or college savings, you face some serious retirement risks. Chief among these: “longevity risk” — underestimating how long you will live.
Financial planners often calculate their projections based on an assumed lifespan of 85 or 90 years. But according to the Social Security Administration, 25 percent of people turning 65 today will live past age 90, and 10 percent will live past age 95. If you're affluent, your chances of living past 95 rise dramatically.
What's your Plan B if you're one of the lucky ones who hangs on until 100 or beyond? Can you continue to save and invest the way you've been doing and know your money will last that long? Planning to make your wealth last as long as you'll need it means considering a few key risk factors.
Related: You Need a Retirement Makeover. Start With These Six Steps.
Common risks demand uncommon foresight.
Sequence of returns matters. If you're a pre-retiree or a recent retiree with a large portion of wealth in equities and mutual funds (or other assets such as real estate), you face the very real risk that these investments' market values will fall just before or after you retire. This can make the difference between enjoying a comfortable retirement and struggling as you forgo life's luxuries — and even life's necessities.
Related: Protect Your Corn: 3 Ways to Self-Fund Retirement in a Means-Tested Social Security World
Withdrawal rate is lower than you think. Many people plan based on the widely recommended “4-percent rule,” which advises withdrawing no more than 4 percent of retirement accounts (adjusted for inflation) each year. Recent studies, however, show that a 2.8 percent annual withdrawal rate is the maximum to make your money last. If you have $100,000 in your retirement accounts, you safely can pull out $4,000 a year using the 4-percent rule — but only $2,800 per year if you want to err on the side of safety. If you have $500,000 saved, you can withdraw $20,000 a year at the higher rate or $14,000 under the more restrictive guideline.
If you haven't thought much about what kind of lifestyle withdrawing 2.8 percent a year from your accounts would give you, you might be feeling a little queasy right about now. And if you're using a 401(k) or IRA as your primary savings vehicle, you’ll have to take any applicable taxes off the top of that number. Now consider what will happen if we experience another market crash of 49 percent or more — it's happened twice since the year 2000. In that scenario, your $1 million 401(k) suddenly becomes a 201(k) worth $500,000, and withdrawing 2.8 percent will provide you only $14,000 a year. Ouch!
Related: 13 Reasons Why Your 401(k) Is Your Riskiest Investment
Healthcare and long-term care costs are skyrocketing. According to a study by Fidelity, a 65-year-old couple retiring now will need $220,000 to cover out-of-pocket health care costs during retirement. That figure assumes you are covered by Medicare and does not take into account possible costs for a nursing home or long-term care.
U.S. Department of Health and Human Services figures are no more encouraging: At least 70 percent of people age 65 or older will require long-term care services at some point, and more than 40 percent will need nursing-home care. Based on the average cost of a private nursing home and the average length of stay, Genworth predicts you would need more than $225,000 to cover a single stay. Unfortunately, many people don't realize Medicare does not pay long-term care expenses.
Risks related to retirement savings are less obvious.
Creditors and predators will target you. Business owners and successful executives are obvious and easy targets for those looking to "create" their wealth through litigation. Opportunists will seek any excuse to sue you personally and professionally for every penny you have. You don't even have to do anything wrong to be sued — and to lose! It's not not fair, but it happens. That's why burglars win judgments for falling through their victims' roofs.
Banks now can seize the money in your accounts. Few people are aware that the 2010 Dodd-Frank Act ensured financial institutions will not be bailed out by taxpayer dollars in the next crisis. Instead, they will be "bailed in" by shareholders and anyone unlucky enough to have deposits in those banks.
The government might be able to confiscate your retirement accounts. Government-approved retirement plans such as 401(k) and IRA accounts are subject to government control, and potentially, government ownership. Because the government created these plans, its agencies know where your money is and how much you have there.
Related: The Retirement Plan Strategy Small-Business Owners Need to Know About
For these reasons and many others, small-business owners need a Plan B to assure a safe and secure retirement. I've researched more than 450 financial products and vehicles, and I've learned there are safe alternatives for building wealth that will last well beyond the working years.
More than 500,000 Americans are saving for retirement using specially designed, dividend-paying whole life insurance policies, such as the ones I advocate in the "Bank On Yourself" method. These plans hold numerous advantages, including safety, liquidity, access, control of your money and many tax benefits.
A solid retirement begins with asking one question you never hear from those pushing the conventional retirement-planning wisdom: What will my retirement account be worth on the day I plan to tap into it?