Retirement is a milestone you have been working your whole life to reach, and nearing that milestone is definitely cause for celebration! After years of calculating, strategizing, and saving, you may feel like you’ve earned the privilege to clock out for the last time and stop worrying about your financial planning. Not quite. In order to take full advantage of your golden years, it is important to continue to make sound financial decisions and take action when it comes to your financial strategy.
We have found that during the first 10 years of retirement, most retirees face the same 5 financial planning challenges. Let’s discuss these challenges so you know what to do when it’s your turn.
1. Not Creating A Withdrawal Strategy
You’ve saved for years, and now you need that money to live on. How you take it out is just as important as how you put it in. That’s why you should capitalize on your wealth by determining a tax-efficient way to withdraw funds in your golden years.
Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s get 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 Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free.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 than your ordinary income tax rate.
Calculating when might be 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 when you’re trying to stretch your money for decades.
Create a withdrawal strategy with the help of a trusted professional who can help ensure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.
2. Throwing The Budget Away
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 during 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. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy, and then create a budget, tracking your money along the way so you stick to your goals.
3. Ignoring Inflation
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This can do more harm than good as it can lead to inflation risk.
The long-term average inflation rate for healthcare expenditures is 5.28%, (1) compared to the current average inflation rate of 2.3%. (2) What does this mean? Retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs.
As tempting as it may be, resisting the urge to worry about short-term stock market volatility may be a good option. With a retirement that could easily last 20 to 30 years, inflation is still a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between principal protection and growth.
4. Neglecting To Create An Emergency Fund
Could you comfortably pay for 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.
Most professionals recommend that retirees have at least 12 to 18 months of expenses in an easily accessible savings account. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it can provide stability during economic downturns. This means you can optimize your portfolio to help beat inflation, as suggested above, while having a safety net to fall back on.
There are other factors that should be considered in determining how much of an emergency fund to maintain, including pensions, other guaranteed income streams, and your required minimum distributions (RMDs). Working with a professional can help you determine how much of an emergency fund to maintain given your specific situation.
5. Planning On Your Own
When tackling any challenge, you know that the best outcome results when you seek out the professional most qualified. You turn to a doctor for health concerns. You turn to a mechanic for car trouble. So although you might have handled your personal finances on your own up until now, retirement is not the time to wing it. Having a trusted wealth manager by your side can be the difference between having a retirement fund that dries up or one you can’t outlive.
Our team at Anderson Financial Strategies would love to be the qualified professionals you turn to when facing the above challenges (and others) on your journey to a comfortable retirement. If you would like to explore our services for your family or business, please call us at 855-237-4545 to schedule an executive briefing to discuss your goals.
About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 15 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and holds the Chartered Financial Analyst (CFA®) designation. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni adviser and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.
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(1) https://ycharts.com/indicators/us_health_care_inflation_rate
(2) https://www.usinflationcalculator.com/inflation/current-inflation-rates/