What comes to mind when you imagine something wiping out your retirement savings? A personal tragedy? A natural disaster? Maybe a recession? There’s no doubt these events could significantly impact your portfolio, but they are largely out of your control. The real dangers to your retirement plan are the little-known and often ignored threats that could cause you to lose what you have diligently worked for. Here are some ways you could run into retirement trouble:
1. Miscalculating Your Retirement Income Needs
If you’ve managed to amass a significant nest egg, you may be pretty proud of yourself. But even if you have half a million or a million dollars saved, it may not be enough. If you plan to retire in your early or mid-sixties, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as healthcare costs, home maintenance, and taxes.
The best way to avoid financial anxiety in retirement is to set up contingency funds to cover the unexpected and work with your financial professional to map out various retirement scenarios to see what your savings can handle. Then, find ways to maximize your savings to give yourself a cushion.
2. Rising Health Care Costs
According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $157,000 to $392,000 in health care costs. Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Without your employer’s health insurance, adequate coverage is typically more expensive and harder to find. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. For example, many people don’t realize that basic Medicare has no cap on out-of-pocket expenses. A supplement is required to achieve a limit on costs. Comprehensive insurance is more expensive but can cap unexpected expenses. If you plan to retire before age 65, be sure to get a pre-Medicare policy in place.
3. Neglecting To Create A Withdrawal Strategy
Just because you’ve worked hard to save for retirement and build up a nest egg doesn’t mean you can rest easy. Once you start tapping into your savings, you need to develop a strategy to withdraw your funds so they last the rest of your life, however long that may be.
Since you know that stocks have historically earned an average of 8% a year, you might assume that you can afford to withdraw 8% of the initial portfolio value (plus a little more for inflation each year). But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% or less. Since there is no simple, one-size-fits-all plan, you need to figure out what will work for you and your unique situation, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.
4. Unexpected Early Retirement
We all know that unexpected life events can occur at any time and derail your plans. The same can happen to your retirement. While the average expected retirement age is 66, most people end up retiring at 62. According to the 2017 EBRI Retirement Confidence Survey, there is a considerable gap between when a person expects to retire and when they actually retire. While 38% of respondents stated that they would like to retire at age 70 or older, only 4% followed through. Most end up retiring earlier and often it’s not by choice.
There’s always the chance you could lose your job or fall ill. Even if you want to work longer and save more, there’s no guarantee that you’ll be able to do that. Early retirement can destroy even well-laid retirement plans. The loss of income during the final years of your career can spell financial disaster, and this is especially true for high earners.
To protect against this risk, plan for the unanticipated. Make sure you have adequate disability insurance to protect your income in the event of an illness or disability. You can also work with an advisor to create scenarios and see what your savings and income would look like if you were forced to retire early.
5. Premature Loss Of A Spouse
Losing your spouse is devastating, regardless of when it happens. But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income.
It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure that you are taken care of no matter what happens.
Create An Action Plan
Retirement planning can be complicated and stressful due to the many unpredictable factors that go along with it. However, by understanding some of the risks and common roadblocks you can experience, you can plan ahead for the unexpected and reduce the chances that your retirement plan will fail.
At Garland & Associates, our goal is to help you build a more secure retirement. With our comprehensive planning process, we can help you prepare for life’s expected and unexpected circumstances. If you think your retirement plan needs a second look, call us today at (515) 226-0115 or email firstname.lastname@example.org.
Terry Garland has over 25 years of experience helping clients address their financial goals. He graduated from Drake University and attended the Wharton School at the University of Pennsylvania. He began at a major financial firm in 1990 and founded his own firm in 1992 that has expanded to offices in Iowa and California. He is a certified wealth strategist and a registered principal. Outside of the office, Terry enjoys traveling, hiking, sports, and spending time with friends and family. Learn more about Terry by connecting with him on LinkedIn or visiting www.garlandandassoc.com.