During the last 18 months, we all experienced a serious lack of confidence in our circumstances; just about every aspect of our lives was called into question, and we were reminded that uncontrollable events can wipe out a nest egg in short order. Now more than ever you want to feel confident about your retirement savings.
Setting aside market turmoil, a personal tragedy, or a natural disaster, the real dangers to your retirement plan are the little-known and often ignored threats that could cost you what you’ve been diligently working for. Let’s talk about 5 ways you could run into retirement trouble and how to help prevent them from upsetting your retirement.
1. Miscalculating Your Retirement Needs
If you’ve managed to amass a significant nest egg, you should be proud of your accomplishment. But no matter the amount you have, you need to be sure it will be enough. If you plan to retire in your early or mid-60s, 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 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. (1) 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.
2. Rising Healthcare Costs
If you’ve ever held a hefty medical bill in your hand, you aren’t alone. American healthcare is more expensive than in any other developed country. (2) And as you age, you will likely require more healthcare services. According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $73,000 to $270,000 in healthcare costs in retirement. (3) Most people don’t even have that much in their retirement accounts to live on, let alone to 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. 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 years 2000-2010, the S&P only generated 1.8% per year! 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. Investment Issues
Diversification is one of the most talked-about investment strategies for a reason: it helps to reduce the risks your investments experience from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings.
Working with a professional, evaluate your portfolio’s current allocation to determine if it needs to be rebalanced or diversified. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
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.
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. But rather than sticking your head in the sand, remember that understanding some of the risks and common roadblocks you may experience helps you plan ahead for the unexpected—which 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 Colorado West Investments would be honored to be that guide, with the end goal of helping you build a more stable retirement. Our quality investment strategies, highly personalized service, comprehensive planning, and objective advice can help you prepare for life’s expected and unexpected circumstances. Do you have yet to put a solid retirement plan in place? Or does your existing plan need a review? Call 970-249-9882 or email firstname.lastname@example.org to schedule an introductory meeting today and see how we can help!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Michael Murphy is an associate wealth advisor at Colorado West Investments Inc., a wealth management firm committed to providing exceptional, comprehensive financial services to highnet-worth individuals, business owners, and retirees. Michael is known for building strong relationships with his clients, helping them clarify their goals and values, and partnering with them to design a financial road map that will help them work toward their ideal life. He is passionate about walking his clients through the financial planning process and seeing the confidence and relief on his clients’ faces as a result. Michael has a bachelor’s degree in finance from the University of Northern Colorado and an MBA from the University of Colorado Denver. When he’s not in the office, you can find him outside, likely hiking or mountain biking, or digging into a book. Michael and his wife, Becca, have 6 dogs at home. Becca runs a dog training and boarding facility. To learn more about Michael, connect with him on LinkedIn.
*Advisors associated with Colorado West Investments, Inc. may be either (1) registered representatives with, and securities offered through LPL Financial, MemberFINRA/SIPC, and investment advisor representatives of Colorado West Investments, Inc. or (2) solely investment advisor representatives of Colorado West Investments Inc., and not affiliated with LPL Financial. Investment advice offered through Colorado West Investments Inc., a registered investment advisor and separate entity from LPL Financial.