People who are retired or close to retirement age should ideally be secure in their long-term financial stability. But just because you think you have done or are doing everything right for retirement does not mean challenges are not there.
To avoid financial mishaps and make sure your retirement is secure, it is important to identify potential pitfalls and plan accordingly. Here are some examples of challenges facing retirees in the next 10 years and how to overcome them.
Outdated Rules of Thumb
When it comes to retirement, there are many well known rules of thumb. They range from a recommendation to save 15% toward retirement to planning on withdrawing no more than 4% annually after retirement. While these “rules” are better than operating on zero guidance, they are hardly guarantees of financial success in retirement.
For many years now, it has been a common sentiment that you need at least $1 million in order to retire. That number often gets thrown out there without consideration of a person’s lifestyle, asset diversity, or income and a lot of people make the mistake of choosing a random number as their retirement fund goal and doing no further planning. But what if that number does not support your goals in retirement? What if that number can wildly fluctuate and drop by 40% with one wild swing in the stock market?
It might seem unthinkable that financially successful people would choose an aspirational number and base their retirement tactics on nothing else. However, it happens more often than you would think. Most people have some magic number that they are trying to achieve, but there is rarely a rhyme or a reason behind that number. I can show you a long list of people who had millions and millions of dollars and still went broke. And I can show you a long list of people who have saved just a modest amount of money and ended up with more than needing.
While a rule of thumb is not a bad place to start, you need to make sure it fits within a comprehensive retirement plan. Whether you consult retirement planning professions or create your own plan, factor in considerations like taxes, income, and social security. A single dollar figure just is not enough.
Uncertain Economic Forecasts and Inflation
One challenge for current or upcoming retirees is economic volatility. In the past 15 years there has been a housing bust, a global pandemic, and a recession. There is also recent inflation and huge price swings in common expenses like fuel and food to consider. Consequently, the nest egg you assumed was sufficient for retirement might not go nearly as far as you thought.
To protect yourself from economic uncertainty, provide yourself with a source of income in retirement. That way, you have some security if your investments see a sudden and dramatic decrease in value. Even if that income is somewhat modest, such as a couple of rental properties, it can still provide a safety net for catastrophe.
The current economic uncertainty also emphasizes the importance of portfolio diversification. Keeping your money or assets in complementary investment classes can stabilize your net worth in times of volatility. For example, technology investments tend to be negatively affected by inflation. If your portfolio is tech-heavy, you should offset that with inflation-advantaged investments such as real estate or raw materials.
Inflation can also affect a retiree’s spending power beyond investment values. One area that sometimes does not occur to people involves social security payments. Theoretically, social security payments are adjusted for inflation and should therefore maintain their spending power. However, certain expenses that disproportionately affect retirees usually rise in price at rates much greater than the overall inflation rate. In the US, the usual offender for this is medical care. Now it must be said that in 2022 medical care costs increased at a lower rate than inflation. Since this was the first time in more than 30 years that was the case, it is a trend that is unlikely to continue. So what that usually means is that social security payments will increase with inflation but retirees’ medical care costs will increase even more.
In the US, to combat these current or future medical payment expenses, it is generally advised to max out your HSA account every year if you are eligible. Funds are contributed, grow, and are distributed tax free as long as they are used for qualified expenses. Since most retirees spend anywhere from $80,000-150,000 on long-term care alone, statistically those funds will get used. And since HSA contributions are not allowed after you file for Medicare, do it while you can.
Cover Your Bases
The retirement landscape has changed in the last several decades. Pensions have all but disappeared, new investment categories such as cryptocurrency have emerged, and the global economy is seemingly more mercurial. What has not changed is the need to protect your lifestyle, plan ahead, and diversify your portfolio. By employing those tactics, you can be secure in your finances and experience the retirement you envision.
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J. Michael Dennis, ll.l., ll.m.
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