Published by Daniel Morrison, Wealth Advisor
Imagine this: you’ve just retired after a fulfilling career and are enjoying the fruits of your labor. You’ve built up a nest egg and have no doubt it will get you through retirement. Fast-forward a handful of years. You’re looking at your accounts, wondering how the balance is decreasing so quickly. Or maybe you’ve run into some expensive life obstacles and are wondering if your earlier confidence was misplaced.
Don’t let this image become a reality. Instead, before you retire, arm yourself with information about these little-known and often ignored threats that could cause you to lose the nest egg you have diligently worked for. Here are some ways you could run into retirement trouble and how to help prevent them from derailing your retirement finances.
1. Miscalculating Your Retirement 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-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. Healthcare Costs That Keep Going Up
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 $157,000 to $392,000 in healthcare costs. (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 protect your investments 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
Thanks to the never-ending unpredictable factors that go along with retirement planning, the whole process can be stressful and complicated. The good news is that understanding some of the risks and common roadblocks you can experience help you plan ahead for the unexpected and reduce the chances that your retirement plan will fail.
At Jacob William Advisory, we are wholly dedicated to helping you achieve your version of True Wealth so you can build a predictable, 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, schedule a custom listening session by contacting our office today at 410-821-6724 or [email protected], and download our free guide, “3 Methods to Not Run Out of Money.”
Daniel Morrison is the co-founder and Managing Partner of Jacob William Advisory, a wealth management firm whose sole mission is to service their clients’ needs beyond their expectations. Dan Morrison has 27 years of industry experience, and for the past decade, he has been committed to building Jacob William Advisory into one of the foremost wealth advisory firms. Dan graduated from the Towson University with a bachelor’s degree of finance in economics and obtained his master’s degree in finance from the University of Baltimore. He is a CERTIFIED FINANCIAL PLANNER™ professional and holds the designations of Chartered Financial Consultant® (ChFC), Chartered Life Underwriter (CLU), and Chartered Advisor for Senior Living (CASL). He and his wife Beth reside outside of Baltimore, Maryland, and have three wonderful children. Dan is involved in his church and is a board member for Believe Big, a charity whose mission is to help families navigate the cancer journey. He enjoys spending time with his family, playing golf, and sailing. A good book is also never far from his reach. Learn more about Dan by connecting with him on LinkedIn.