What is your number-one fear in retirement? If you’re like most Americans, your top fear is that you won’t have enough money to last through retirement, with only 27% of pre-retirees believing they’ll be ready financially for a retirement lasting 10 years. (1) While your current retirement account balance may be causing you stress, there are other little-known and often ignored threats that could cause you to lose the nest egg you have diligently worked for, no matter how big or small it is. Here are some unexpected threats to your retirement plan and ideas for how to prevent them from derailing your finances in retirement.
1. Misjudging Your Retirement Needs
If you’ve managed to amass a significant nest egg, you might be pretty proud of yourself. But even if you have half a million or a million dollars saved, it may not be enough. If you plan to retire in your early or mid-60s, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as healthcare costs, home maintenance, and taxes.
The best way to avoid financial anxiety in retirement is to set up contingency funds to cover the unexpected and work with your financial professional to map out various retirement scenarios to see what your savings can handle. Then find ways to maximize your savings to give yourself a cushion.
2. Rising Healthcare Costs
According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $151,000 to $255,000 just to cover their healthcare costs in retirement. (2) Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Without your employer’s health insurance, adequate coverage is typically more expensive and harder to find. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all your Medicare options and supplements and work with an experienced professional to help you evaluate these options. For example, many people don’t realize that basic Medicare has no cap on out-of-pocket expenses. A supplement is required to achieve a limit on costs. Comprehensive insurance is more expensive but can cap unexpected expenses. And if you plan to retire before age 65, be sure to get a pre-Medicare policy in place.
3. Neglecting To Create A Withdrawal Strategy
Just because you’ve worked hard to save for retirement and build up a nest egg doesn’t mean you can rest easy. Once you start tapping into your savings, you need to develop a strategy to withdraw your funds so they last the rest of your life, however long that may be.
Since you know that stocks have historically earned an average of 7-8% a year, you might assume that you can afford to withdraw 7-8% of the initial portfolio value (plus a little more for inflation each year). (3) But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% or less. (4) Remember, in the years 2000-2010, the S&P only generated 1.8% per year! Since there is no simple, one-size-fits-all plan, you need to figure out what will work for you and your unique situation, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.
4. Unexpected Early Retirement
Life rarely goes as expected. If you haven’t prepared for life’s surprises, they can derail your well-laid plans. The same can happen to your retirement. While the average expected retirement age is 66, most people end up retiring at 62. According to the 2017 EBRI Retirement Confidence Survey, there is a considerable gap between when a person expects to retire and when they actually retire. (5) While 38% of respondents stated that they would like to retire at age 70 or older, only 4% followed through. Most end up retiring earlier, and often it’s not by choice.
There’s always the chance you could lose your job or fall ill. Even if you want to work longer and save more, there’s no guarantee that you’ll be able to do that. The loss of income during the final years of your career can spell financial disaster, and this is especially true for high earners.
To help protect against this risk, plan for the unanticipated. Make sure you have adequate disability insurance to protect your income in the event of an illness or disability. You can also work with an advisor to create scenarios and see what your savings and income would look like if you were forced to retire early.
5. Premature Loss Of A Spouse
Losing your spouse is devastating, regardless of when or how it happens. And while this is something most try to avoid thinking about, the hard truth is that losing a spouse during the final years of their career can be especially dangerous for the surviving spouse’s financial plan and well-being. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on the pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income.
It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure that you are taken care of no matter what happens.
Create An Action Plan
Retirement planning can be complicated and stressful due to the many unpredictable factors that go along with it. However, by understanding some of the risks and common roadblocks you may experience, you can plan ahead for the unexpected and reduce the chances that your retirement plan will fail.
At Beacon Wealth Management, our goal is to help you build a predictable and reliable retirement road map that will protect your assets and ensure you receive the income you need to enjoy your golden years. With our disciplined professional process, we can help you prepare for both life’s expected and unexpected circumstances and establish a solutions-based wealth strategy to help you reach your goals. If you want to get started on your retirement plan or think your current plan needs a second look, call (304) 626-3900 or email me at firstname.lastname@example.org and download your free retirement readiness kit!
John is the founder and owner of Beacon Wealth Management. He specializes in helping entrepreneurs, professional practitioners, and retiree red-zoners overcome the major financial challenges facing affluent families.
As a trusted and friendly financial partner, John delivers a collaborative client experience that empowers and guides people to reach a greater purpose for their wealth and pursue their financial dreams. He understands the multifaceted set of financial worries people face as they become more successful and get within the retirement red zone.
John is well-regarded throughout the business community for his expertise. He has appeared as an expert guest on the The Brian Tracy Show and Hollywood Live with Jack Canfield, is the co-author of the book Masters of Success with Brian Tracy, is the host of the WDTV News 5 segment “Solutions 4 Financial Independence,” and has conducted hundreds of educational events on Retirement and Investment Advisory, Tax Reduction, and Wealth Transfer Planning. These include many Universities, Federal Employee Organizations, Professional Associations, and Large Energy Companies throughout the eastern United States.
With more than two decades of experience, John is credentialed as a Certified Wealth Strategist (CWS), Accredited Investment Fiduciary (AIF), Certified Estate Planner (CEP), Chartered Federal Employee Benefits Consultant (ChFEBC), Professional Plan Consultant (PPC), and Registered Financial Consultant (RFC). He is also a past multi-year member of Ed Slott’s Master Elite IRA Study Group.
A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a Wealth Advisor. Today, he resides with his family in Clarksburg, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-oriented man, he is passionate about giving back to his community, coaching youth sports, landscaping, architectural design, and playing racquetball.