Unexpected Problems Can Hurt Your Retirement

(Image credit: Stígur Már Karlsson)

As they look ahead to the future, too many retirement-minded investors simply haven’t paid enough attention to the setbacks and problems that can damage their plans and dreams for retirement.

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Frankly, too many investors don’t even know how to start their retirements by making smart decisions about turning on their Social Security benefits, pensions and other retirement income streams. Even when they are planning ahead and saving for their retirements, if they’re not careful, investors can get tripped up by not taking into account several often-overlooked challenges.

Turbulence in the stock market

One unexpected challenge in retirement is stock market volatility. Over the course of your career, you build your portfolio and rely on various investments to build a nest egg for retirement. Too often, as the years pass, you rely on the same strategies you have always used, not realizing that your priorities have changed. Simply put, what worked for you when you were in your 30s and 40s might not work as well when you are nearing retirement.

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All of this being the case, plenty of retirement-minded investors are carrying too much investment volatility in their portfolios because they rely heavily on market-driven investments. If the market drops, these investors can be left high and dry, especially if they are at or near retirement. We saw too many investors in exactly this situation back in 2008. In your retirement, of course, you will need accounts to draw income from, but you need to make sure you aren’t exposed by carrying too much risk. One good tactic is to ensure, no matter what accounts you rely on for your income, that they are as free from volatility and risk as possible.

We’re living longer

There are plenty of other overlooked challenges in retirement that you need to factor into your planning. People are living longer, which means more of us are in danger of outliving our money. As they live longer, retirees also face the serious threat of inflation, something too many investors ignore as they plan for their retirements. Traditionally, inflation has not been much of a factor in retirement planning, but, as retirees live longer, it is increasingly becoming an issue. Inflation needs to be part of your retirement calculations, especially as the costs of goods and services continue to increase.

Troublesome taxes

There are other overlooked pitfalls in retirement as well, including taxes. Too often, investors don’t think about how taxes will impact their retirement. That’s a serious mistake because you face losing some of your biggest tax deductions, such as 401(k) contributions, mortgage expenses and credits for child care, when you retire. Another problem is too many retirement-minded investors might have diversified their portfolios, but they cannot say the same thing about their taxes. They have packed most of their savings into traditional 401(k)s and IRAs, but they will have to pay taxes on that money when they take it out, often at higher rates than when they first stashed it away.

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Instead of relying on a single vehicle, you would be better off looking at other options, including Roth IRAs and Roth 401(k)s, which offer you more flexibility and tax diversity and, of course, do not force you to take required minimum distributions.

There are other unexpected problems as well, including:

Health care. Many of us will face a gap in coverage if we retire before we are eligible for Medicare.
Social Security. Too many of us simply don’t know the best ways to draw Social Security and other retirement income.

What’s at risk

Our working years are like climbing a mountain. We scratch and claw as we try to make our way to the top. Once we draw near retirement, when we are almost near the top of that mountain, we have more to lose and a longer way to fall. The last thing you want to do in your retirement is fall off that mountain and start your ascent over again. It’s far better to carefully climb down the mountain during your distribution years and enjoy your retirement.

The right financial adviser, one who specializes in retirement, can help you climb up and then get back down the mountain. Your retirement is too important to leave to chance. A knowledgeable and experienced adviser who has a background in retirement planning can help you prepare for the unexpected challenges you will face in retirement.

Kevin Derby contributed to this article.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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John Culpepper is a financial adviser and insurance professional as well as a senior partner and founder of Creative Financial Group in Indianapolis. John holds a bachelor's degree in business. He began working in the financial services industry in 1997 and has acquired the kind of in-depth knowledge that comes from many years of experience guiding clients through the ups and downs of the economy.