One of the most common issues Americans face when it comes to retirement is the fear of not having enough money to retire successfully. This fear is so prominent that only 27% of pre-retirees believe they’ll be financially prepared for a retirement lasting 10 years.1 And while ensuring your finances are in order for retirement by simply saving a portion of your money is a critical requirement, there are other little-known and often ignored threats that could cause you to lose the nest egg you have diligently worked to establish. Here are 5 ways you could run into retirement trouble and how to help prevent them from derailing your retirement finances.
1. 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 simply 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, you should be sure to get a pre-Medicare policy in place.
2. 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 dependable 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 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.
3. Putting All Your Eggs In One Basket
Diversification is one of the most talked-about investment strategies for a reason: it helps protect your investments 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.
Working with a professional, evaluate your portfolio’s current allocation in order to determine if it needs to be rebalanced or diversified. When doing so, it is vital that you look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
4. Unexpected Early Retirement
We all know that unexpected life events can occur at any time and derail your 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. Early retirement can destroy even well-laid retirement plans. 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 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 can experience, you can plan ahead for the unexpected and reduce the chances that your retirement plan will fail.
At ATL Global Advisors, our goal is to help you build a predictable and reliable retirement plan so that you can live out your golden years in comfort and peace. With our comprehensive planning process, we can help you prepare for both life’s expected and unexpected circumstances. If you are interested in beginning your retirement plan or think your current plan needs a second look, email me at kevin.myers@atl-ga.net or call 770-800-2851 today. Or you can simply click here to book your free introductory meeting online right now!
About Kevin
Kevin Myers is a financial advisor and managing partner at ATL Global Advisors, an independent financial services firm serving transportation and logistics employees in the greater Atlanta area. With more than two decades of industry experience, he specializes in providing private wealth management services to business owners and their families, with the goal of helping them realize their financial dreams. Learn more by connecting with Kevin on LinkedIn.
1 https://www.marketwatch.com/story/retirement-anxiety-is-universal-as-is-the-antidote-2017-02-28
2 https://www.ebri.org/pdf/notespdf/ebri.notes.oct13.retsvgs1.pdf
3 http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
5https://www.ebri.org/pdf/surveys/rcs/2017/RCS_17.FS-4_Age.Final.pdf