5 Unexpected Threats To Your Retirement Plan
By Preston Rosamond
What is your number-one fear in retirement? If you’re like most Americans, you might be afraid you won’t have enough money to last through retirement. In fact, only 27% of pre-retirees believe they will be financially ready 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 retirement dreams.
1. Miscalculating Your Retirement Needs
If you’ve managed to amass a significant nest egg, you may 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 work with your financial professional to map out various retirement scenarios to see what your savings can handle. Knowledge will empower you, especially in this situation. Almost half of those polled in the annual Transamerica Retirement Survey admitted they have only guessed at how much they will need for a comfortable retirement. (2) 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. 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 8% a year, you might assume you can afford to withdraw 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) 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 protects 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 to determine if it needs to be rebalanced or diversified. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
4. Forgetting To Take Required Minimum Distributions
If you are 70½, you must begin taking required minimum distributions (RMDs) from your traditional IRA and employer-sponsored retirement accounts. It doesn’t matter if you need the money when you reach this age, you must still adhere to the RMD rules. What happens if you don’t follow through? The IRS will charge you an excess accumulation penalty of 50%! That can significantly harm your retirement savings amount.
As an example, if you are required to withdraw $5,000 and don’t, you will owe a whopping $2,500. That is an unnecessary and avoidable loss. Depending on how much you have in an emergency fund, you may even be forced to use your retirement savings to pay the penalty, further damaging your future financials.
5. Premature Loss 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.
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 The Rosamond Financial Group, our goal is to guide you to financial success and help you navigate the challenges of life. With our comprehensive planning process, we can help you prepare for life’s expected and unexpected circumstances. If you think your retirement plan needs a second look, book a free introductory meeting online!
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch and a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing firstname.lastname@example.org or schedule a call with our online calendar.