The Top 5 Financial Planning Challenges in the First 10 Years of Retirement
By Marjorie L. Rand, CPA, CFP®, RICP®
As exciting as the prospect of retirement is, it can also be fraught with worry. Many pre-retirees second-guess their decision. What if it’s too soon to retire? What if expenses far outweigh retirement income?
These common worries can be eased with the right retirement strategy. And these five financial planning challenges, when tackled early on, can help you better prepare your road to retirement.
1. Not Creating a Withdrawal Strategy
Financial planning doesn’t stop once you enter retirement. Capitalize on your wealth by deciding the most tax-efficient way to withdraw funds in your golden years.
Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
As you can see, calculating the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill.
Create a withdrawal strategy with the help of a trusted professional who can make sure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.
2. Overspending in Retirement
Many people spend their retirement years doing all the things they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.
It’s easy to underestimate the amount of money you’ll spend those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. My advice? Create a spending plan. Calculate your monthly income given your withdrawal strategy (See #1) and then create a budget.
3. Ignoring Inflation
Another major challenge I see new retirees face is the desire to play it safe in the stock market. This does more harm than good as it leads to inflation risk.
While healthcare expenditures are typically affected less by inflation than other spending categories, from 2021-2022 there was a 4.0% increase in medical care services compared to the historical average inflation rate of 1.23%. What does this mean? Retirees are more likely to feel the effects of inflation due to mandatory expenses, such as healthcare costs.
As tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is still the biggest threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between protection and growth.
4. Not Having an Emergency Fund
Could you comfortably pay an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
It used to be recommended to have 3 to 6 months of expenses saved up in an easily accessible savings account, but now more professionals are recommending at least 12 to 18 months’ worth. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it provides stability during economic downturns. This means you can optimize your portfolio to beat inflation (#3 on our list) while having a safety net to fall back on.
5. Going Through Retirement Alone
It is never too soon to start planning for your golden years. My main focus is on retirement planning, with customized service and expertise geared toward the unique needs of retirees. 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.