If you thought saving for retirement was tough, wait until you see what’s next for your nest egg.
The reality is that pile of money you accumulated won’t do you much good unless you can turn it into income that will last 20 years or more. And that means keeping a watchful eye out for all kinds of risks in retirement.
Having an income plan in place can help you battle the Big 4:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Tax risk
Of course, your goal is to keep as much of your money as possible. But if you’ve been socking away savings in a tax-deferred retirement plan (such as an IRA, 401(k), 403(b), etc.), you have a silent partner in Uncle Sam. Withdrawals from those accounts — whether you take them in your 60s or when they’re required starting at age 70½ — will be taxed as ordinary income. It’s critical to have strategies built into your plan to keep the damage to a minimum. Talk to a financial adviser and/or tax professional about how you can manage your tax bracket each year — filling up the lowest bracket possible without spilling into the next. And keep an eye on how your deductions and exemptions may change once you retire — if you pay off your house, for example, or if you no longer own a business.
2. Inflation risk
Taxes take a bite out of your nest egg; inflation slowly erodes it. If you live on $5,000 a month right now, by 2027, you’ll likely need a little more than $6,700 a month to maintain the same lifestyle (based on a 3% rate of inflation). You can’t necessarily count on getting the same cost of living adjustments (COLAs) that you got when you were employed. Some pensions offer them, but many do not. And Social Security’s COLAs are unpredictable. To hold onto your purchasing power over the decades, you’ll have to build some inflation protection into your plan. Long-term, stocks may be your best inflation fighter — but they come with their own risks. Consult with your financial professional to discuss your specific needs and options.
3. Investment risk
A market downturn can devastate your nest egg — especially if you’re close to retiring or recently retired. It’s important to position your savings in a way that ensures you have sustainable, reliable income every month. The easiest way to think about it is as though your money is in different buckets.
- The first bucket is the money you’ll spend down through the first five years of your retirement. It should be filled with cash and safer investments. They may earn only 2% or 3%, but in the worst downturn, they shouldn’t lose more than 1%.
- The next bucket is for years six through 10. This money can be a bit more growth-oriented, but as you get closer to using it, you should become more conservative with how it’s invested … like bucket No. 1.
- The third bucket is for money you won’t need to touch for 11 or more years. Eventually, you’ll use it for income, but it can be invested more aggressively than the money in the first and second buckets, because if there’s a loss, you’ll have time to recover.
4. Estate and legacy risk
Your plan also should extend to the loved ones who will inherit your money. Proper positioning will help you leave a legacy without passing on any estate-planning snafus or excessive taxes to those who receive it. Talk to your adviser about how this applies to your retirement accounts, and if you should be looking at life insurance and other alternatives.
Your income plan is arguably the most important part of your comprehensive retirement plan. It will help you figure out what you need and where that money will come from. And when you reach retirement, it will help preserve the money you’ve worked so hard to save.
Kim Franke-Folstad contributed to this article.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five QuestionsWho said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
