The Top 5 Financial Challenges in Early Retirement

The Top 5 Financial Challenges in Early Retirement

March 22, 2024

When you enter retirement, you step into uncharted territory as you say goodbye to the security of a regular income and fixed routine. Now you’re embarking on a season of life with limited resources and boundless leisure time—likely a big shift from your lifelong routine! It’s also a time when all your efforts to save and prepare are going to pay off.

In the initial decade of retirement, we’ve observed that most retirees deal with five common financial hurdles. Curious to learn more? Keep reading.

Not Creating a Withdrawal Strategy

Up until this point, your focus has likely revolved around accumulating wealth. Employing strategies like dollar-cost averaging, which is making periodic investments over time, has proven successful for many investors over the years. However, as you transition into retirement, your plan will shift from accumulation to decumulation. It’s important to recognize that what worked during your wealth-building years may not be as effective now. 

Drawing periodic withdrawals in retirement carries risks, particularly the sequence of return risk, which can significantly impact the longevity of your portfolio. What is sequence of returns risk? It is the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of a portfolio. Timing is everything, and in retirement, early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain a retiree. To safeguard against this risk, it’s crucial to develop a comprehensive game plan that helps shield your investments from having to sell assets that have declined in value. This proactive approach can help create sustainability in your retirement income plan over the long term.

You also will want to capitalize on your wealth by deciding the most tax-efficient way to withdraw funds in your golden years. Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate. 

As you can see, calculating the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill.

Create a withdrawal strategy with the help of a trusted professional who can make sure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.

Overspending in Retirement

Many people spend their retirement years doing all the things they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.

It’s easy to underestimate the amount of money you’ll spend those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. My advice? Create a spending plan. Calculate your monthly income given your withdrawal strategy (See #1) and then create a budget. 

Ignoring Inflation

Another major challenge we see new retirees face is the desire to play it safe in the stock market. This does more harm than good as it leads to inflation risk. 

While healthcare expenditures are typically affected less by inflation than other spending categories, from 2021-2022 there was a 4.0% increase in medical care services compared to the historical average inflation rate of 1.23%. What does this mean? Retirees are more likely to feel the effects of inflation due to mandatory expenses, such as healthcare costs. 

As tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is still the biggest threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between protection and growth. 

Not Having an Emergency Fund

Have you ever thought about how you would manage a sudden, significant expense during your retirement without jeopardizing your financial future? It's a scenario that many individuals may not have fully considered. Just as you were encouraged to prioritize building an emergency fund in your younger years, the necessity of having one in retirement cannot be overstated. It serves as a crucial safety net to navigate unexpected financial hurdles and help protect your long-term financial security.

It used to be recommended to have 3 to 6 months of expenses saved up in an easily accessible savings account, but now more professionals are recommending at least 12 to 18 months’ worth. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it provides stability during economic downturns. This means you can optimize your portfolio to beat inflation (#3 on our list) while having a safety net to fall back on. 

Navigating Retirement On Your Own

After years of careful planning to build and safeguard your wealth, you don’t want to leave your retirement finances to chance. Partnering with a reliable financial advisor is an essential step to make sure your retirement plan remains strong and stable. Avoid the risk of depleting your savings prematurely by seeking experienced guidance for your financial journey ahead. 

If you’re ready to take the next step, I invite you to call (248) 220-4321 or email robert@cwmfinancial.net. You can also schedule a meeting by visiting www.calendly.com/cwmrob/initial.

About Rob

Robert Moore is senior partner, financial planner, investment advisor, and co-owner of CWM Financial, an independent, fee-based wealth management company based in Troy, MI. With over 20 years of experience, Rob provides customized advice and solutions that are in the clients’ best interest. He strives to always go above and beyond his clients’ expectations, helping them retire with more security than they had before, and invest their time and energy in what’s most important to them. Rob specializes in working with DTE Energy employees, helping them maximize their benefits so they can reduce taxes, prepare for retirement, and protect their families through a comprehensive planning process. Rob graduated from Michigan State University and holds the CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant® (ChFC®) certifications.

Rob is known as a diehard family man who enjoys spending time with his beautiful wife, Jill, his daughter, Brookelyn, and his son, Brayden. When he’s not working, you can find him playing basketball once a week, squeezing in a round of golf, and watching college football and basketball with friends and family. He is passionate about enriching the lives of others through his church involvement and service at a community addiction program. Learn more about Rob by connecting with him on LinkedIn.