Although much of life feels uncertain right now, the last thing you want to feel unsure about is your retirement savings. But when you think of things that could wipe out your nest egg, like market turmoil, a personal tragedy, or a natural disaster, remember that these events 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 two major reasons you could run into retirement trouble and how to help prevent them from derailing your financial future.
Miscalculating Your Retirement Needs
If you’ve managed to amass a significant nest egg, you may be pretty proud of yourself. But regardless of the amount you have to your name, it may not be enough. If you plan to retire in your early or mid 60s, your retirement savings will likely 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.
For example, the average couple at age 65 will require anywhere from $73,000 to $270,000 in healthcare costs in retirement. (1) And that’s not including long-term care. It’s estimated that 70% of people will need some form of long-term care during their lifetimes, which means it’s critical to factor these potential expenses into your retirement plan. (2)
The best way to avoid financial anxiety in retirement is to work with your financial professional to map out various retirement scenarios to see what your savings can handle. Knowledge will empower you, especially in this situation. Almost half of those polled in the annual Transamerica Retirement Survey admitted they have only guessed at how much they will need for a comfortable retirement. (3) Don’t let that be you. Once you have an idea of what you’ll need for your unique situation, set up contingency funds to cover the unexpected and find ways to maximize your savings to give yourself a cushion.
A Withdrawal Strategy That Doesn’t Work
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 7-8% a year, you might assume that you can afford to withdraw 7-8% of the initial portfolio value (plus a little more for inflation each year). (4) But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% or less. (5) Remember that in the years 2000-2010, the S&P only generated 1.8% per year!
Then there are taxes to consider. Your retirement accounts are all taxed differently. If you don’t have a strategic withdrawal plan in place, you could end up with a large tax bill at the end of the year. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability.
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: time horizon, risk tolerance, asset allocation, and unexpected living expenses.
Prepare for These Threats (and Others)
The whole retirement planning process can be complicated. And taking into account the known variables as well as unknown and unpredictable factors, it’s understandable if you’re feeling overwhelmed. The good news is that understanding some of the risks and common roadblocks you may experience helps you plan ahead for the unexpected and reduces the chance that your retirement plan will fail.
The best way to experience confidence on your retirement journey is to partner with an experienced professional. We at the Center for Wealth Management would be honored to be that guide, with the end goal of helping you build a more stable retirement. Our quality investment solutions, highly personalized service, comprehensive planning, and unbiased advice can help you prepare for life’s expected and unexpected circumstances. If you think your retirement plan needs a second look, call (248) 220-4321 or email robert@cwmfinancial.net. You can also schedule a no-obligation introductory meeting by visiting www.calendly.com/cwmrob/initial.
About Rob
Robert Moore is senior partner, financial planner, investment advisor, and co-owner of Center for Wealth Management, an independent, fee-based wealth management company based in Troy, MI. With more than 15 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® (CFP®) and Chartered Financial Consultant® (ChFC®) designations.
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.
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(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html
(4) http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm