The marathon to retirement has been long and challenging, but you’ve finally got the finish line in your sights! You didn’t reach this milestone without decades of hard work, calculating, strategizing, and saving, and I’m sure you’re ready for a well-deserved break. Not so fast—put the brakes on for a second. Yes, you’ll be putting your career behind you, but not your retirement plan. All that preparation and sound decision-making still need to be top of mind to continue your financial strategies in retirement.
Transitioning to retirement brings its own set of hurdles, and I’ve found that most retirees face the same 5 financial planning challenges within the first 10 years. Let’s take a look at these challenges so you can be prepared and confident to tackle them and take full advantage of your golden years.
1. Withdrawal Strategy Neglect
Perhaps the most frequently asked question I get from people at or approaching retirement is how to turn their hard-earned savings into an income stream to replace the income they will lose from their paycheck. Determining a proper distribution strategy, and an appropriate rate of distribution from your assets, is not something to be taken lightly. It is a decision that likely requires analysis of your other existing income sources like pensions or Social Security, your asset allocation amongst your various investment accounts, and the tax implications involved with these withdrawals.
At the heart of this decision is often the tax consequences to be dealt with depending upon which type of account the money is withdrawn from. Different account types will have different tax considerations to navigate. Pre-tax accounts such as IRA, 401(k), 403(b) and other similar plans will generally be taxed at ordinary income tax rates, whereas non-qualified or non-retirement accounts will typically receive capital gains tax treatment, which is generally more favorable than ordinary income tax rates. Roth IRA and Roth 401(k)/403(b) accounts may receive potentially tax-free distribution status in the event certain conditions are met. When determining which accounts to take distributions from first in retirement it is important to consider how each of these will be taxed and how it impacts your overall tax burden in conjunction with other income you will receive throughout the year. Taking distributions from one account type, or splitting it between multiple different types of accounts, can make sense depending on the situation.
A second consideration when determining the proper withdrawal strategy centers around the allocation of your investments both in the account from which distributions are to be taken, as well as the accounts that will be left untouched until some later time. Though you may be comfortable with a 60% stock, 40% bond portfolio overall, it may not make sense for every account to be allocated equally in trying to achieve that mark. Consideration should be given for the current market conditions you find yourself in at retirement, and the available investment options from which you have to choose at that time. Avoiding significant volatility while taking distributions in retirement can be an important consideration in making your money last as long as you do.
2. Throwing the Budget Away
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 during 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. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy, and then create a budget, tracking your money along the way so you stick to your goals.
3. Inflation Woes
Another major challenge I see new retirees face is the desire to play it safe in the stock market. This can do more harm than good as it can lead to inflation risk.
The long-term average inflation rate for healthcare expenditures is 5.23%, (1) and the current average inflation rate is a whopping 5.3%. (2) This means retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs.
A 2021 Retirement Risk Readiness Study from Allianz insurance company found that 71% of participants were worried about the rising costs of healthcare, 67% were worried about rising costs of living, and 66% were worried that market downturns would affect their savings. (3) These percentages represent significant increases from the survey’s 2020 results.
With a retirement that could easily last 20 to 30 years, inflation is a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between principal protection and growth and be proactive about inflation risk.
4. Not Prioritizing an Emergency Fund
Could you comfortably pay for an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
Most professionals recommend that retirees have at least 12 to 18 months of expenses in an easily accessible savings account. (5) This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and can provide stability during economic downturns. This means you can optimize your portfolio to help beat inflation, as suggested above, while having a safety net to fall back on.
There are other factors that should be considered in determining how much of an emergency fund to maintain, including pensions, other guaranteed income streams, and your required minimum distributions (RMDs). Working with a professional can help you determine how much of an emergency fund to maintain given your specific situation.
5. Planning on Your Own
Although you might have handled your personal finances on your own up until now, retirement is not the time to wing it. You turn to a doctor for health concerns. You turn to a mechanic for car trouble. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up or one you can’t outlive.
I would love to be the professional you rely on when tackling the above-mentioned challenges (and others) on your way to a comfortable retirement—in fact, my focus is to secure, maintain, and protect your financial lifestyle throughout every stage of life. If you would like to find out more about how I can help, schedule a free introductory meeting online, call (248) 220-4321 or email me at email@example.com.
Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER® (CFP®).
Outside of work, Justin enjoys spending time with his family. He lost his wife of 18 years, Heather, to brain cancer in 2020. He and his son, Carter, and twin daughters, Jaden and Kelsey, work to honor her and make her proud each day. Outside of work, you can usually find him coaching baseball, softball, and basketball, and spending time at their family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.