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Making Your Money Last

Worried You're Never Going to Be Able to Retire?

Five common threats to your retirement (and how you can tackle them now).

Some people spend more time thinking about retirement than others, but most everyone has at least a few ideas about what their life will be like when they don’t have to work anymore.

Unfortunately for many, hoping and dreaming is about as far as they get in the planning process. They don’t know whether they can really achieve their goals because they haven’t taken the steps necessary to prepare for them.

If that sounds like you, and you’re anywhere close to the age you think you’d like to be when you retire, let me warn you: Your retirement reality could be far different from the lifestyle you’ve imagined. And if it is, it likely will be because you ignored one or more of these five basic threats:

Threat No. 1: Unclear plans.

This threat is especially difficult for married couples transitioning to retirement. It’s amazing how far apart two people who’ve lived together for years can be when it comes to envisioning what they want and understanding how they’ll get it.

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How to tackle it: Put together an income plan and an estimated budget.

  • Start by talking about when each of you would like to retire and why — and be specific. Perhaps one of you loves your job or still has career goals, and the other doesn’t. Maybe one of you is older. Don’t assume you know what your spouse wants to do.
  • Discuss what life will look like every day. What will you do to stay busy? What will you do for fun? What are the “big” things you have in mind: a trip to Europe, a second home, joining a golf or tennis club?
  • Then consider how much that will cost and how you’ll pay for it. You’ll need to budget for day-to-day expenses (housing, utilities, food) and all those extras if you really want them to happen. Estimate how much guaranteed income you’ll have with Social Security benefits and possibly pensions. And if there’s a gap between your costs and those steady income streams, think about how you’ll fill it — by working longer, downsizing your dreams or by carefully managing the assets in your investment portfolio.

Threat No. 2: Medical costs.

A lot of soon-to-be retirees assume Medicare will take care of all their future health care costs, but Medicare and Medicare supplement plans have limits. According to Fidelity Investments’ 16th annual retiree health care cost estimate, a 65-year-old couple retiring in 2018 will need $280,000 to cover health care expenses throughout retirement — and that doesn’t include the cost of long-term care. Without a plan to cover unexpected bills, you might end up pulling the money from your investment accounts, a move that can have dire consequences for your financial future.

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How to tackle it: Set aside a war chest for major medical bills.

  • If you plan to retire early, think about how you’ll pay your medical bills and insurance premiums before Medicare kicks in. Some possibilities to consider could include individual policies, COBRA coverage and a spouse’s employer’s plan.
  • When you’re eligible for Medicare, carefully choose the best coverage for you and your spouse.
  • Set aside a protected “war chest” that will help pay for unexpected expenses, no matter what happens to your health (or U.S. health care laws). Typically, it is best practice to have a minimum of two times your annual retirement income in this account. However, based upon your personal medical history and current condition, you may want to save more, up to $280,000, as mentioned above.

Threat No. 3: Investing too conservatively.

Pre-retirees and retirees are right to worry about market risk when they don’t have as much recovery time. But some go too far when transitioning to the protection phase of investing, and they end up putting their entire portfolio into short-term or guaranteed investments earning 1% or 2%.

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How to tackle it: Divide the money inside your portfolio into three “buckets” to get a blended rate of return.

  • The first bucket is for funds you’ll need in the near future, 12-24 months. Look for financial products with little or no stock market risk. This bucket will earn a money market rate of return. In today’s environment, you should be able to expect 1.85%-2.10%.
  • The second bucket contains funds meant for needs a little further down the road, three to six years, so you aren’t going to touch it for a few years. You may have very low-risk products, such as short-term bonds, laddered CDs and TIPS. But you also should have some conservative growth assets with the idea of marginally increasing your rate of return. Examples of those could include high dividend paying stocks, growth and income stock mutual funds and preferred stock.
  • The third bucket is for money you’ll need much later, six years or more, so you’ll have growth-oriented assets in there. These typically would include growth stocks, growth mutual funds and international mutual funds. If the markets move down and these investments lose money, you’ll have time to recover because the funds are earmarked for use seven to 30 years into your retirement.

Threat No. 4: Not knowing how much risk is in your portfolio.

People tell me all the time that they’re “conservative” investors. They think their portfolio accurately reflects their concern about market volatility and their time horizon. But when we analyze what they actually have, we find that it’s not the case at all. For many, if they’d had their current portfolio in 2008, they would have down over 50%. That’s a devastating loss for someone who’s near or in retirement.

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How to tackle it: Get a detailed analysis of your portfolio.

  • “Conservative” is a subjective term. An analysis can show you specifics.
  • A long-running bull market can throw your asset allocation out of whack. Some rebalancing could be in order. When you rebalance, make sure that you consider the goal or purpose of the investment portfolio. Consider your goals, time horizons, and tolerance for risk. Often times you will need to sell some of your stock holdings and reposition the proceeds into lower-risk investments, such as bonds, CDs and cash.
  • Once your portfolio is adjusted for your needs, you may experience some envy when friends who might have less-conservative portfolios brag about their returns. Remember, you’re in this for the long haul.

Threat No. 5: Inflation.

Often, when people build their retirement plan, they set and forget their budget, not recognizing that prices fluctuate over time — as do the interest rates on the investments retirees typically prefer. So, inflation can quietly and slowly eat away at a nest egg.

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How to tackle it: Adjust your investments and your withdrawals.

  • Don’t invest too conservatively. Determine how much growth you’ll need to accomplish your income goals. Your income need will increase over time, due to the cost of goods increasing. This is called inflation. Over the last 30 years, the average inflation rate has been 2.54%. That means that the amount of income you need to maintain the same standard of living needs to increase by 2.5% every year. Set aside some assets to do that work.
  • Many people rely upon an old rule of thumb called the 4% rule. This rule states that if you only withdrawal 4% of your account balance per year, that you will never run out of money. This rule does not take into account extreme market decreases, higher than normal inflation, or personal spending decisions. Instead, a retiree should focus on their projected monthly income needs. Look into the next three years and project how much income you need each month to meet your monthly income needs, your extra fun things that you wish to do, and any larger expense items that will need to pe purchased. By doing so, you will be able to balance out your annual income to stay ahead of inflation.
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Sadly, I’ve seen retirement plans implode — or darn near it — when people ignored these common threats. Don’t let that happen to you. The next time you start daydreaming about retirement, grab your spouse and start putting your thoughts down on paper. Then get to work on making those dreams come true.

Kim Franke-Folstad contributed to this article.

Securities offered only by duly registered individuals through Madison Avenue Securities LLC (MAS), member of FINRA/SIPC. Investment advisory services offered only by duly registered individuals through AE Wealth Management LLC (AEWM), a Registered Investment Adviser. MAS and Creekmur Wealth Advisors are not affiliated entities. AEWM and Creekmur Wealth Advisors are not affiliated entities. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 637538

About the Author

John Creekmur, CFP

Co-Founder, Creekmur Wealth Advisors

John Creekmur is the senior wealth adviser and co-founder of Creekmur Wealth Advisors (www.creekmurwealth.com). He is a CERTIFIED FINANCIAL PLANNER™ professional (CFP®).

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