12 Threats to Retirement Many People Aren’t Prepared For
When it comes to retirement planning, there seems to be an unlimited number of variables to account for. Nevertheless, once you are aware of prudent financial habits and knowing which pitfalls to avoid, building wealth can become much easier.
As a financial advisor helping investors in all stages of their careers, we see 12 threats that many investors miss when planning for retirement.
1. Market Volatility
For some investors, their retirement plans incorporate a required or expected rate of return to reach their retirement goal. Volatile markets can jeopardize these targets, especially when your retirement is on the horizon.
No one has a crystal ball, of course, so it’s important to have realistic projections and prepare for the unexpected. Having strong savings and spending habits is key. While some investments are less prone to the ups and downs of the market, all investments involve some kind of inherent risk. Work closely with your financial advisor to run the numbers of your financial plan so you understand how different market returns will affect your future retirement.
Investing assumptions can be dangerous. Read our recent blog post: 5 Common Misconceptions About Market Volatility and Your Investments.
2. Retirement FOMO
The “fear of missing out” can keep you from enjoying retirement. Generally speaking, retirees expect to have lower expenses in retirement – maybe the mortgage has been paid off, commuting expenses have disappeared and work expenses, such as business lunches and attire, are no more. But sometimes, expenses actually increase.
Do you plan to travel in retirement? Take on an expensive hobby? Relocate?
Spending is at or near the center of your entire retirement plan. Your spending in retirement determines how much you need to save beforehand and how long your assets can be sustained. Discuss your day-to-day plans in retirement before giving your notice at work so you have a realistic idea of your budget in retirement. Do your best to avoid keeping up with the Joneses, or spending outside of your previously established financial plan. If possible, test your expected budget ahead of time. Live on your retirement budget while still working and address any gaps you notice.
Remember to keep your cost-of-living in mind. Retirement planning in Delaware will look different than retirement planning in California, for example, where housing and other expenses may be higher.
Let’s face it, emergencies are sometimes inevitable. Accidents and unexpected events happen, whether it’s on a broad scale like the recent pandemic, or a one-off issue that you experience personally. Sometimes, you may need to take a hefty cost on the chin. But can you?
Before the pandemic, it was reported that 40 percent of Americans didn’t have $400 to spend in an emergency without borrowing or selling an investment. But you don’t have to fall in that category.
Establish an emergency fund before retirement so you have a solid financial shield and you won’t have to take on bad debt or sell an investment prematurely to handle an unexpected event.
Like the old saying goes, “It’s not how much you make, it’s how much you keep.”
Saving on taxes will go a long way for your savings overall, including your retirement. The good news is proper tax management and saving for retirement can align very nicely.
Tax and retirement savings can be your one-two punch with the right strategy. Talk to your financial advisor to make sure you incorporate the right tax-planning strategies for you.
5. Job Loss
Losing a job for any reason can be difficult and can threaten your retirement in a few ways.
For starters, the loss of income may immediately require you to lean on your emergency savings and stop your monthly retirement savings (at least temporarily).
Secondly, there’s no guarantee that your new job can match your old salary, benefits and retirement plan availability.
Obtaining a new job may require you to change your retirement plan, which may involve working for longer if you experience a pay cut. (Read our recent blog post: Your Retirement Plan and a Job Change: What You Need to Know.)
6. Forced Early Retirement
Expanding on a job loss, what if you’re forced to retire earlier than expected? Though retirement is the goal, retiring early can introduce a number of new challenges. Can your retirement plan stretch the extra years you’ll need it to cover? If you retired early because of health concerns, do you have health coverage when you’re no longer working? Will you have to take Social Security benefits earlier than expected? Will you qualify for Medicare at the time of retirement? If you haven’t reached your savings goal by the time you retire, you may have to quickly scramble to adjust your plan.
If you do have to retire early, make a new plan with your financial advisor immediately to fit your current situation. If working part-time is an option, discuss the ramifications with your financial advisor. (Read our recent blog post: 9 Ways Retirees Can Earn Extra Income.)
From losing a house to court-ordered settlements, there are economic consequences to both sides of a divorce. Depending on your state and the conditions of the divorce, the results can be disastrous.
Talk to your financial advisor about spousal benefits, create a budget based on your new lifestyle and make sure to update your estate plan.
8. Inflation/Cost of Living Changes
If overlooked, inflation can disrupt even the most well-thought-out retirement plans. Though it’s hard to see one’s own purchasing-power shrinking, the money sitting in your savings account may be earning interest at a slower pace than prices are increasing due to inflation.
Talk to your financial advisor about ways to buffer inflation-risk through specific investment assets. While Social Security benefits include an annual Cost Of Living Adjustment (COLA), this shouldn’t be your only line of defense. Not only should Social Security not be your only source of income in retirement, but some industries, such as healthcare, tend to increase at rates higher than inflation.
Did you take an early withdrawal from your retirement account? Did you miss an important milestone?
Following rules and financial mandates can preserve your retirement savings. Otherwise, you can be subject to penalties that can unnecessarily burn your retirement assets.
For example, withdrawals from your retirement accounts before you turn 59-½ are penalized 10 percent and are subject to taxes.
On the other side of the coin, during your retirement, you are forced to withdraw an amount of your pre-tax retirement accounts each year until the account balance is zero. Failing to make this Required Minimum Distribution (RMD) results in a 50 percent excise tax. You’ll keep much more money in your pocket if you follow IRS and industry mandates, or find an exception!
10. Long-Term Care
Without a long-term-care insurance policy, your out-of-pocket costs for these expenses can range from $20,000 to $100,000 annually. Furthermore, it’s estimated that 70 percent of seniors will need some form of long-term care during their lifetime. Therefore, it’s a potential expense that should be addressed in your financial plan.
Long-term care is not covered by Medicare. This includes needs like assisted living, home care and nursing homes. Long-term care is covered by Medicaid after all of your other expenses have been exhausted.
Make sure to discuss long-term care with your financial advisor. You can also download our free eBook: Long-Term Care Insurance: What to Know to Protect Your Wealth.
11. The Sandwich Generation
The Sandwich Generation refers to those who find themselves having to care for their aging parents while also caring for their children. As you can imagine, this demographic faces emotional and financial challenges on many fronts. Focusing on your own life and finances can be hard enough, but individuals sandwiched between caring for aging parents and their children juggle three sets of financial concerns – their own, their parents’ and their children’s. They may be worried about saving for college, their parents’ estate planning and their own personal retirement planning, while staying on a budget that incorporates everyone’s goals.
As challenging as being sandwiched can be, it’s important to compartmentalize the different components of your life, especially your finances. Lean heavily on your financial advisor when forming and implementing a financial plan, automating your investments and utilizing any other financial tool at your disposal. Have open conversations with both your parents and your children, if appropriate. Involving your financial advisor in these discussions can help keep the conversation on track.
Some of the most dangerous assumptions we see people make include the expectation that certain assets will always produce returns. Dividend payments can change any time, pensions can be bought out, and sources of income that seem constant can be disrupted.
Outside of financial assets, remember that family can offer new variables as well. There’s always a chance that your parents will need care, or perhaps your adult children will need to move back in unexpectedly.
Don’t assume your income will last forever.
Maintain a strong relationship with your financial advisor, and when life does get off track, contact him or her and review your next steps. Making a plan can help you plan for and avoid the aforementioned threats to your retirement.