Ah, retirement. It’s a cherished dream for hardworking Americans across the nation. If you find yourself in the age range of 55 to 75, you’re currently in what’s known as the retirement red zone, which is the 5-to-10-year period before and after retirement.
This is an exciting time after all your years of hard work. But it can also be a bit nerve-wracking because even a small mistake can put your entire retirement plan at risk. Today let’s explore five common risks that often arise during the retirement red zone and discuss strategies to prevent them from derailing your golden years.
1. Miscalculating Your Retirement Needs
If you’ve managed to amass a significant nest egg, you have reason to be proud of yourself! But even if you have- 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 map out various retirement scenarios to see what your savings can handle. We routinely review these scenarios for our clients. Knowledge will empower you, especially in this situation. Once you have an idea of what you’ll need for your unique situation, set up contingency funds to cover the unexpected and find ways to maximize your savings to give yourself a cushion.
2. Healthcare Inflation
If you’ve ever held a hefty medical bill in your hand, you aren’t alone. The United States has one of the highest costs of healthcare in the world. And as you age, you will likely require more healthcare services.
According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will require $315,000 to cover healthcare costs in retirement. Most people don’t even have that much in their retirement accounts to live on, let alone to cover medical costs. 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 Medicare options and supplements and work with an experienced professional to help you evaluate your 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. If you plan to retire before age 65, be sure to get a pre-Medicare policy in place.
3. An Inadequate 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 the historical average return of the stock market is roughly 10% per year, you might assume that you can afford to withdraw that much from your portfolio each year. But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% - 5% or less. The market volatility of the last couple of years proves just how risky it is to bank on a 10% return every year. Since there is no simple, one-size-fits-all plan, your withdrawal strategy will need to be tailored to your unique needs, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.
Keep in mind that whatever withdrawal strategy you use, you will still need to consider the tax impact of your plan. Many people forget to plan for this crucial component and end up with less than they needed after taxes were paid. Make sure you are structuring your retirement plan in a tax-efficient way to avoid paying more than you have to during your golden years.
4. Market Downturns
With talks of a looming recession, many people in the retirement red zone are fearful about how much downside risk their plans can handle. This is a valid concern given the market volatility of the last couple years. Here’s where tried-and-true investing principles come into play.
Diversification is one of the most talked-about investment strategies for a reason: it helps to reduce the risks your investments experience from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings.
It is important to evaluate your portfolio’s current allocation. You may need to rebalance or diversify your positions. Look at the big picture of all your accounts to ensure you are diversified across the board. It may also be helpful to consider a flexible withdrawal strategy which involves withdrawing less (and spending less) in the years where the market underperforms.
5. Unexpected Death of a Spouse
Losing your spouse is devastating, regardless of when it happens. But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on 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.
Set Yourself Up for Success
Retirement planning can be stressful, complicated, and risky due to the unpredictable variables that inevitably show up. But don’t worry, there’s good news! Understanding the risks and common challenges allows you to prepare for the unexpected and increase the chances of a successful retirement plan.
At Favor Wealth, we specialize in guiding clients through this critical phase, helping them navigate the retirement red zone with confidence. Through customized and tax-efficient retirement planning, we have successfully assisted many retirees through this transition. Get in touch by contacting us at 626-529-0445 or emailing Ricky directly at info@favorwealth.com.
About Ricky
Ricky Biel is founder, wealth manager and Chartered Retirement Planning Counselor℠ professional at Favor Wealth, an independent financial advisory firm serving individuals and families near Pasadena, California. Ricky Biel founded Favor Wealth with a desire to provide unbiased, client-centered, community-based financial advice. Ricky and his team of caring, smart professionals want their clients to feel like they’ve done them a favor, making it easier than ever to accomplish their financial goals by blending proven investment methodologies with creative financial technologies. He is on a mission to help his family of clients feel both a sense of relief and excitement about their future. Favor Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the Favor Wealth team may be able to help, contact them today at 626-529-0445 or email Ricky directly at info@favorwealth.com.
The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Favor Wealth Advisors’ employees providing such comments, and should not be regarded as a description of advisory services provided by Favor Wealth Advisors or performance returns of any Favor Wealth Advisors’ Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Favor Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.