The Riskiest Time in Retirement
By Marjorie L. Rand, CPA, CFP®, RICP®
If you are between ages 55 and 75, congrats! You are in the 5-to-10-year span before and after retirement known as the retirement red zone. After years of hard work, this is an exciting place to be! But it can also be quite nerve-wracking because one wrong move can risk derailing your entire retirement plan. Here are 5 risks that often pop up in the retirement red zone and how 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. (1) 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. (2) 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, (3) 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. (4) 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.
Build a Strong Defense
Because there are unpredictable factors that go along with retirement planning, the whole process can be stressful, complicated, and risky. The good news is that understanding some of the risks and common roadblocks can help you plan ahead for the unexpected, reducing the change that your retirement plan will fail.
At Rand Financial Planning, we help our clients navigate the retirement red zone with confidence. I have helped many retirees through this transition through customized, tax-efficient retirement planning. Schedule a 20-minute introductory call or reach out to me at 908-895-2406 or marge@randfinancialplanning.com to see if I’m the right fit to help you on your financial journey.
About Marge
Marjorie Rand is founder and financial advisor at Rand Financial Planning, a comprehensive, fee-only, fiduciary financial planning firm. Marge specializes in helping her clients plan for a secure retirement and navigate life’s many transitions through customized, tax-efficient retirement planning. She is passionate about empowering her clients to make the best financial decisions for their life and being by their side no matter what life throws at them. Marjorie spent many years as a CPA before founding Rand Financial Planning so she could be a go-to source for all her clients’ financial needs and help them avoid costly mistakes. She has a bachelor’s degree in accounting from Rutgers University and a Master of Science in Taxation from Fairleigh Dickinson University, along with the Retirement Income Certified Professional® (RICP®) and CERTIFIED FINANCIAL PLANNER™ certifications. When she’s not working, Marge enjoys boating, horseback riding, traveling, and hiking with her husband and her dog, Rangeley. To learn more about Marjorie, connect with her on LinkedIn.____________
(1) https://www.pgpf.org/blog/2022/02/why-are-americans-paying-more-for-healthcare
(2) https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
(3) https://seekingalpha.com/article/4502739-average-stock-market-return
(4) https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last