The most common pitfalls of retirement planning are inflation, taxes, market risk, and long term healthcare. Planning and setting aside funds for retirement can enhance your enjoyment in post-work years. Unfortunately, there are also some pitfalls that reduce lifestyles in that same period. A while ago I heard the phrase world money destroyers used for the top retirement risks to retirement savings. I agree with the sentiment and added the fourth pitfall, long term healthcare to the list.
The unknown nature of these four retirement risks often leave retirees with financial shortfalls that their original retirement plans didn’t cover. While these financial risks cannot be fully known, there are ways we can help you plan to cover them. We’ll explain the top four retirement risks here and are happy to explain more if you want to contact us here.
Impact of Inflation on Retirement Planning
To be clear, inflation doesn’t reduce your retirement savings. Instead, inflation raises the cost of future expenses, reducing the purchasing power of your retirement savings. To counter inflation, you can base your savings on historical average rates. But regrettably, history has proven outside factors may still impact the actual inflation numbers to your disadvantage.
For instance, traditionally, the Federal Reserve attempts to keep the inflation rate to around 2% per year. In 2023 actual inflation was twice that rate in the first quarter. As if that wasn’t enough, variations in the rate increases spiked basic costs of living. Food and shelter costs rose over 8%. Since no plan can perfectly account for an unknown quantity, people address the resulting savings shortfall in different ways.
Review the Budget and Adjust Spending or Income
One way retirees handle inflation is to cut their budget allowances in non-essential areas or increase their income. If you can find expenses to temporarily reduce or cut, you may not need to take unplanned or larger distributions in the short term. If you think the price hikes are temporary, perhaps you can defer a big expense until prices drop again. Another way to cover the shortage caused by inflation is to pick up additional income. Part-time work can help cover cost of living increases caused by inflation. As we mentioned, once inflation hits, either of these methods could help. Before you retire, there are alternative methods of protecting your retirement savings ahead of the ravages of inflation. Though cash loses value during inflation, by having enough on hand, you can cover emergency expenses. It could help you avoid increasing your distribution amounts or dipping into your long term investments.
Broaden Your Retirement Planning Strategy
Since your priorities and risk tolerance change over time, your portfolio should change too. To ensure the right balance, regularly review your portfolio for the right balance of investments. Talk to a financial consultant to learn how much to set aside for retirement without changing your portfolio balance to an uncomfortable risk level. A regular review of your retirement plan is key to protecting the plan against inflation. The right asset allocation changes with life events and priorities. Talk to a professional to make sure your plan is on track even if inflation surpasses expectations.
How Taxes Affect Retirement
Covering tax rates today for retirement in the future, is like planning to make payments on an adjustable rate loan without ever knowing the interest rate. You know you need to pay it, but you don’t actually know how much you need to pay until the payments are due.
Since you don’t know your tax rate when you begin drawing your RMD you don’t really know what you will have access to in retirement years. You will need to pay income tax on your pension and on withdrawals from any tax-deferred investments like IRAs, 401(k) s, 403(b) s in the year you take the money. Those taxes, when due, reduce the amount of money left for your retirement. There are some insurance plans that aren’t taxed and are still an option even as you get closer to retirement. (Ask us about our five year retirement plan and find out why it has over 97% member retention rate.)
Retirement Plan and Market Risk
By investing in financial market assets, retirement plans contain inherent risks. The most obvious risk is that the stock will have a lower value if the financial market is down. There are certainly cycles that help predictions, but there are also anomalies that impact the market like the recent worldwide pandemic. If the market falls around the time retirement begins, the retirement portfolio may enable less buying power than in different states of its cycles. The most common approach to mitigating this risk is to diversify your retirement portfolio to include stocks, bonds annuities and a new option, the leveraged five year whole insurance option.
Long Term Healthcare Coverage
Though you may be aware of your current healthcare needs and trends, your future healthcare is still an unknown expense. Treatment of a short term medical condition is expensive enough, but what if you have a chronic medical condition that requires ongoing medical treatment or treatments? Especially with today’s changing Medicare policies, out of pocket health costs can quickly eat away your retirement, reserves and your legacy plans. With the exception of the recent pandemic fallout, Americans have been living longer than ever. It is no surprise that many experience some form of long term healthcare need during their lives after retirement.
Foss Financial Helps You Clarify Your Plan
Each of the retirement planning pitfalls that we have discussed can be mitigated with regular review and adjustment of their retirement plan. At Foss Financial Services, we regularly help people recognize the financial pitfalls in their own plans. We’ll help develop ways to correct those risks, and even bring in experts for legal and tax advice if needed. We’re your comprehensive solution protecting your retirement. We’ll implement simple tools to discover your current priorities and goals, as well as ways to reach them. Contact us here for a no obligation call to discuss your future.
