Business owners retiring today face more financial challenges than their parent’s generation. Healthcare costs are increasing at a faster rate than inflation, and due to increasing longevity, those costs will consume an ever-increasing portion of their retirement budget. More retirees are carrying mortgages into retirement, and nearly half find themselves sandwiched between their aging parents and their own financially struggling children. Many are carrying upside-down mortgages and other debt into retirement. With the rising cost of retirement, many business owners are finding that their income needs are not much lower, and sometimes even higher, than their pre-retirement needs.

Confronting New Challenges

For as long as the need for retirement planning has existed (and that may only go back as far as the WWII era when workers began actually to retire), retirees have had to contend with inflation risk (the risk of lost purchasing power) and market risk (the risk of loss in the market). But, the game-changer, a factor that has profound implications for retirement planning, is longevity risk - the risk of outliving your income, which is a terrifying notion for any retiree.

Inflation Risk

Today’s retirees face a new set of problems regarding inflation. First, because guaranteed pension plans are generally a thing of the past, retirees must rely on their own capital to generate sufficient income for their extended lifetimes. Not only must they be able to accumulate capital at a rate that exceeds inflation, but they must also be able to sustain a rate of growth on their capital throughout their lifetime that at least paces inflation.

Secondly, and this goes back to longevity risk, inflation has a much more significant impact on purchasing power when assets and earnings are exposed to it for 20 or 30 years. Even a modest inflation rate of 3 percent will cut purchasing power nearly in half over 20 years.

Market Risk

Market risk has always been a factor for retirees, but more so as pension plans began to disappear, and they have had to rely increasingly on accumulating their own capital as a long-term income source. The implication of market risk was never more evident than during the market crash in 2008 when the values of stocks and mutual funds held in retirement plans plummeted by as much as 40 percent almost overnight. Anyone within ten years of retirement saw their dreams evaporate.

Where prior generations, secured by pension income, may have avoided market risk, today’s retirees must embrace it if they hope to achieve and sustain any semblance of a comfortable standard of living. For today’s retirees, avoiding market risk will almost certainly expose their assets and income to the risk of inflation and longevity. The good news is that with retirement timeframes stretching out 25 to 30 years, market risk can be mitigated through the normal ebb and flow of the market cycles.

Longevity Risk

Your longevity is a measure of the number of years of life expectancy and the risk that you may exceed it. While that’s not a bad thing, the risk is that your retirement plan is based on your life expectancy, and your longevity risk could put you in danger of outliving your income.

The problem is as you age, your longevity increases. For example, a 60-year-old male can expect to live until age 81, while a 70-year-old male is expected to live until age 84. And it keeps expanding the older you get. It’s more pronounced for females who have longer life expectancies than men.

Planning for Compounding Risks

Many business owners work well into retirement, and when they hang up their boots, they tend to focus on market and inflation risks when planning their retirement income needs. However, longevity risk can have even more severe implications when combined with market and inflation risk.

When planning your income needs in retirement, it’s essential to make realistic assumptions about your time horizon to ensure lifetime income sufficiency.