Retirement is a goal many aim for after a fulfilling career. It's a time many anticipate for relaxation and leisure. However, planning for retirement requires careful consideration. There are various risks and potential challenges to ensure a comfortable future. Here are some retirement risks and pitfalls to be aware of as you prepare for this next chapter.
Longevity Risk
People are living longer. It’s as simple as that. Unfortunately, the intent of the average retirement plan is only to provide for a few years. While that was sustainable in the 1950s when the average life expectancy was only 68 years, it’s a different story now that the average life expectancy is a little over 76 years. It means retirement funds need to last longer and may need to survive long-term inflation, long-term medical costs, and taxes throughout those extra years.
Investment Risk
Sadly, all investments do not live up to their potential. That means that not every dollar you’ve invested in your retirement will deliver the dividends you hoped for. Some may result in total losses for you (this is why diversification is essential for your retirement planning). The average person can afford one or two less-than-desirable results along the way. However, the more investments fail to deliver positive results, the lower your lifestyle expectations during retirement must be. The fewer investment failures you face, the better it is for your financial future.
Inflation Risk
Inflation can be challenging, especially for those on a fixed income. While everyone hopes for a comfortable lifestyle in retirement, inflation can reduce your purchasing power, making you reconsider your spending priorities. Essentially, inflation means prices of goods rise while your income remains stagnant, making your money worth less over time. Given the impact of inflation in our consumer-driven society, one strategy to safeguard your savings might be to invest in TIPS (Treasury Inflation-Protected Securities) and Series I bonds.
Healthcare Risk
Healthcare is a significant expense for any consumer. Even with good insurance, the costs can be prohibitive, especially if you have a condition that requires long-term or lifelong care, like diabetes, cancer, heart disease, and many others. The older you get, the greater your risk of developing severe long-term health conditions. That means you may require continuous medical monitoring, daily medications, periodic laboratory and diagnostic testing, and routine medical care and treatments. These things all come at costs that only increase over time.
Sequence of Return Risks
A sequence of returns risk arises when you face a combination of poor investment returns and ongoing withdrawals. While your investment portfolio might handle one of these events independently, their combination can make it harder to recover quickly. This risk concerns retirement portfolios or funds earmarked for specific retirement goals. When building your retirement portfolio, remember that timing is crucial; aim to avoid withdrawals during critical downturns.
Tax Risk
Tax planning is critical for the long-term success of your retirement plan. It would be best to plan out when you will receive which funds to have a healthy combination of taxable and non-taxable income in a given retirement year and manage which tax bracket you will be in from one year to the next. It is a delicate dance that requires precise planning and perfect execution to deliver a flawless performance for your retirement portfolio.
Long-Term Care Risk
Touching back on the topic of health care costs and the risks they represent, the soaring costs of long-term care in the United States make it critical to add some degree of thought and planning to mitigate these risks to your investment portfolio – especially since Medicare and many other regular insurance policies do not offer this particular type of coverage for consumers. Those that do offer this insurance protection charge a hefty premium for the services they deliver.
Social Security Missteps
Timing is everything when it comes to Social Security. You want to maximize your contributions and time to receive the maximum possible payout for your years of effort. Sometimes, that requires an advisor to crunch the numbers on your behalf and maximize your potential ROI. Additionally, you want to avoid making filing mistakes that could cost you months of coverage and funding as you wait for the appeals process to play out and for your corrections to be acknowledged.
Lack of Diversification
Diversification is critical to protect your overall retirement portfolio from a hard crash in any area of the economy. If you do not have sufficient diversification, you could work well beyond your desired retirement date to make up for the misstep. Some people may never recover sufficiently to overcome the error.
Neglecting Estate Planning
Estate planning isn’t only about what you will leave behind for your family. It is also about ensuring you have sufficient cash flow to cover the costs of ordinary expenses like food, medicine, housing, and many other of life’s little emergencies once you retire. Neglecting this aspect of the planning process could result in a cashflow crisis you will be hard-pressed to overcome when operating on a fixed income in retirement.
Takeaways
Retirement is that golden day you’ve looked forward to for many years. Don’t let common mistakes rob you of your retirement joy. Work now to mitigate these potential mistakes so you can live your best possible life every day of your retirement.