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:
Sign up for Kiplinger’s Free E-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.
-
Stock Market Today: Stocks at Record Highs as Earnings Season Ramps UpMarkets continued where they left off last week amid rising optimism over corporate profits.
-
How to Rank Your Financial PrioritiesCircumstances are different for everyone, but this adviser with 20-plus years of experience shares some insights on getting your financial priorities in order.
-
How to Rank Your Financial Priorities
Circumstances are different for everyone, but this adviser with 20-plus years of experience shares some insights on getting your financial priorities in order.
-
When Does a Nest Egg Become a Ticking Tax Bomb?Retirement savers with big bucks in traditional IRAs and pretax 401(k)s could face huge tax bills when RMDs kick in. One potential solution? A Roth 401(k).
-
Medicare or Medicare Advantage: Which Is Right for You?From overall costs to availability of care, here's what to know about the differences between traditional Medicare and Medicare Advantage plans.
-
Wealth Is More Than Just Your Money: How to Manage It AllIn addition to handling your financial wealth, consider ways to manage your non-financial assets: health, knowledge, time and relationships.
-
You're 60 Years Old With $1 Million Saved: Can You Retire?The answer depends on several factors. The key is to create a plan that combines all aspects of retirement — income, taxes, health care and legacy planning.
-
Are You a Danger When You Drive?You might be shaking your head no, but read on for the five things that most of us have at some point done, or are doing, that could cause an accident.
-
Come as You Are: Wealth Management for Gen XGen X is stuck in the middle of kids and aging parents, but retirement's not far off. Time to prioritize, with help from Nirvana, The Eagles and David Bowie.
-
UTMA: A Flexible Alternative for Education Expenses and MoreThis custodial account can be used to pay for anything once the beneficiary is considered an adult in their state. There are some considerations, though.
