What comes to mind when you imagine something wiping out your retirement savings? A personal tragedy? A natural disaster? Maybe a recession? There’s no doubt that these events could significantly impact your portfolio, but they 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 5 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. While it may be impossible to predict exactly how long your nest egg will last, you can run your figures through different scenarios to see what might happen if the market crashes, if you face unexpected healthcare costs, or if a spouse dies prematurely. Once you stress-test your savings in this way, you can come up with a plan to prepare for these risks. If you wait until you are retired to take this step, it may be too late to make the changes necessary to maximize your retirement income.
Don’t be like over half of those polled in the annual Transamerica Retirement Survey who admitted they have only guessed at how much they will need for a comfortable retirement. (1) Work with a financial professional to come up with some numbers and then test drive a reduced budget based on your savings and how long they will need to last you. To start, try living on 80% of what you currently receive. Do you find yourself pinching pennies or did you find even more ways to cut back?
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. The Headache of 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 $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.
3. Ignoring Your Investments
Did you just set and forget your retirement accounts, or are you keeping an eye on how your investments are allocated as you draw closer to retirement and your risk tolerance changes? Sequence of returns, or the risk of receiving lower or negative returns early in a period when you’re making withdrawals from your investments, can impact your portfolio’s value over time. If your retirement date correlates with the onset of a bear market, your savings can be depleted quickly as you withdraw from your portfolio. With a smaller investment base, you’ll have less wealth remaining to benefit from a future market upswing.
To mitigate the risk of sequence of returns ruining your retirement portfolio, work with your advisor to take the appropriate steps, such as reducing volatility, examining your withdrawal strategy, and finding different market options to protect your money.
4. Forced Early Retirement
It’s no secret that life can throw unexpected curveballs at any time and derail your plans. The same can happen to your retirement. More than 4 in 10 retirees end up retiring earlier than planned, for reasons stemming from disability to company changes to caring for a family member. (4)
No one likes to think about it, but the reality is there’s always the chance you could lose your job or fall ill. Therefore, even if you want to work longer and save more, there’s no guarantee that you’ll be able to. Early retirement can destroy even well-laid retirement plans. The loss of income during the final years of your career can spell financial disaster, and this is especially true for high earners.
To help protect against this risk, plan for the unanticipated. Make sure you have adequate disability insurance to protect your income in the event of an illness or disability. You can also work with an advisor to create scenarios and see what your savings and income would look like if you were forced to retire early.
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.
Both spouses must 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
When it comes to retirement, it’s hard to plan for every possibility. The good news is that by partnering with a professional who can help you understand some of the risks and common roadblocks you may experience, you can successfully plan ahead for the unexpected and reduce the chances that your retirement plan will fail.
At Sirius Wealth Management, our comprehensive planning process can help you prepare for life’s expected and unexpected circumstances. If you’re not feeling as confident as you’d like to be and think your retirement plan may need a second look, schedule an introductory meeting to see if we are the right fit by calling 636-449-4890 or emailing email@example.com.
David Domian has been working in the financial services industry since 1980 and specializes in financial planning with a focus on retirement planning. His planning concentrates on four specific goals: the accumulation of wealth, the reduction of taxes and volatility in retirement, the necessary strategies to deal with the risks of longevity, and the passing of an estate in a private, tax-efficient, and protected manner. David holds designations as a CFP® CERTIFIED FINANCIAL PLANNER™, ChFC® Chartered Financial Consultant, CLU® Chartered Life Underwriter, and AEP® Accredited Estate Planner®.
David has been married to his wife, Sue, for over 41 years, and together they have four children and eight grandchildren. Dave is a big believer in family and still has family dinners almost every Sunday with most of his kids, grandchildren, and even his 97-year-old mother. Dave and Sue have lived in St. Louis all their lives. He enjoys spending time outdoors, especially fishing with his grandchildren; he knows they will only be young for so long and you have to live in the moment. This year will be Dave’s 18th annual cross-country motorcycle trip with three college friends; together they have traveled through over 40 states on these memorable road trips.
Dave and Sue support many charitable organizations, including the MS-Society, Cystic Fibrosis, the Lupus Foundation, St. Louis Men’s Group Against Cancer, and the Mary Culver Home for vision-impaired women, where his mother lives. Their support comes in an unusual way: Dave and Sue donate a BBQ (including a pig roast, cooked, carved, and served on site), which is auctioned off at one of their live events. This popular auction item is a great way for Dave and Sue to have fun and do some good in the community. Dave also serves as a board member on the Estate Planning Council of St. Louis.