By Ember E. Martin, CFP®
Planning for retirement can be stressful. And we know the last thing you need right now is more stress. But with all the chaos that 2020 brought into our lives, we also know you’re hoping for a relaxing, enjoyable life post-retirement now more than ever. And you’re likely concerned about how recent events will affect your retirement. Keep in mind that it’s not just about planning to reach this milestone; you also need to plan for the years that follow. Without the security of a steady paycheck and a structured schedule, you’re embarking on a journey into the unknown of finite resources and endless free time. Will all your years of hard work pay off?
We’ve found that most retirees face the same 5 financial planning challenges during the first 10 years of retirement. To help ensure your golden years are free of worry and regret, keep reading.
1. Neglecting To Create A Withdrawal Strategy
You’ve saved for years, and now you need that money to live on. How you take it out is just as important as how you put it in. That’s why you should capitalize on your wealth by determining a tax-efficient way to withdraw funds in your golden years.
While a successful retirement is earmarked by multiple income streams, be aware that different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s get taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so qualified distributions are withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different than your ordinary income tax rate.
As you can see, calculating the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill. Create a withdrawal strategy with the help of a trusted professional who can make sure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.
2. Overspending In Retirement
Many people spend their retirement years doing all the things they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.
It’s easy to underestimate the amount of money you’ll spend those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy and then create a budget, tracking your money along the way so you stick to your goals.
3. Forgetting To Factor In Inflation
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This does more harm than good as it leads to inflation risk.
The long-term average inflation rate for healthcare expenditures is 5.28%, (1) compared to the current average inflation rate of 2.3%. (2) What does this mean? Retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs.
As tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between preservation and growth.
4. Not Having An Emergency Fund
Could you comfortably pay an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
Most professionals recommend having at least 12 to 18 months of expenses in an easily accessible savings account. (3) This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it provides stability during economic downturns. This means you can optimize your portfolio to try and beat inflation (#3 on our list) while having a safety net to fall back on.
5. Going Through Retirement Alone
After counting down the days to retirement, you’re finally packing up your office for good. And now it’s time to find out if all those years of working and saving will pay off. It took decades of strategizing to grow and protect your wealth up until reaching this milestone, so don’t try to “wing it” and manage your money alone. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up and having one you can’t outlive.
Rather than preparing for these challenges on your own, our team at Vested Wealth Advisors would be honored to guide you on your retirement journey. Schedule a free 15-minute introductory phone call online or reach out to me at 844-548-2887 or info@vestedwealthadvisors.com. I look forward to hearing from you!
About Ember
Ember E. Martin is founder and managing principal at Vested Wealth Advisors, an independent financial planning firm. With over 20 years of investment managing and financial planning experience, plus his CERTIFIED FINANCIAL PLANNER™ (CFP®) credential, Ember strives to help his clients live a high-quality life through customized advice and an unmatched level of personal service and confidentiality. Ember has become known for providing personalized guidance, creative solutions, and results-driven services that go beyond what many have come to expect from traditional financial advisors. When he’s not working, Ember enjoys sharing life with his high school sweetheart, Donna. You can also find him cooking, reading, traveling, hiking, playing chess, and spending time with his two teenage daughters, Lucie and Truly. To learn more about Ember, connect with him on LinkedIn.
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(1) https://ycharts.com/indicators/us_health_care_inflation_rate
(2) https://www.usinflationcalculator.com/inflation/current-inflation-rates/
(3) https://www.thebalance.com/how-much-emergency-savings-do-retirees-need-4582473