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.
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 (opens in new tab), 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.
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%.
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.
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.
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.
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
Stock Market Today: Stocks End Lower Ahead of Powell Speech
Investors continued to grapple with Friday's strong jobs report and how it might impact the Fed's decision-making.
By Karee Venema • Published
Legalized Weed Sales Begin in Missouri: This Week in Cannabis Investing
The Show Me State legalized recreational weed in 2022, with sales officially underway as of last Friday.
By Morgan Paxhia • Published
Four Steps to Financial Wellness for Black History Month
The small financial steps you take today, such as showing yourself empathy and building credit and savings, can add up to help you create a better tomorrow.
By Aaron Harding, CFP® • Published
The Impact of Social Security on Divorced Retirement Income
Social Security spousal benefits can quickly get complicated when remarriages and other circumstances are taken into account. Let’s explore some examples.
By Chris Chen, CFP® • Published
Are You a Money Moron? Where’s Our Financial Common Sense?
Not to be harsh, but shouldn’t we all have seen this economic angst coming? Let’s get frank about Money Moron Syndrome and how to avoid falling victim to it.
By Neale Godfrey, Financial Literacy Expert • Published
Personal Finance Tips for the Year of the Rabbit
Being intelligent like a rabbit by making smart choices about spending and saving, paying attention to details and exercising patience in investing can help increase financial security.
By Marguerita M. Cheng, CFP® • Published
Which Charitable Giving Archetype Are You?
Understanding the charitable giving archetype that resonates with you can make it easier to align your giving with the difference you most want to make.
By Catherine Crystal Foster • Published
Different Approach to Financial Planning Addresses ‘the Missing Middle’
Nontraditional financial planning model allows you to pay for the expenses you incur between now and retirement — the middle of your life — without losing the ability to build wealth.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) • Published
Thinking of Starting a Business? Tips for Avoiding Failure
Two experts offer some advice on what not to do if you want to succeed (rather than sink) as a small-business owner.
By H. Dennis Beaver, Esq. • Published
A Retirement Income Distribution Plan Is as Critical as Saving
Designing a strategy to efficiently use your retirement savings is a critical step on your retirement planning journey to maximize your income and ensure a long-lasting retirement.
By Bradley Rosen • Published