Everyone considers, at one time or another, what it would be like to know the future—optimistic that knowing would enable them to make good decisions and avoid common pitfalls along the way. In retirement planning, this is especially true. Preparing for these possible eventualities is the next best thing.
The following outlines five common roadblocks that can disrupt your retirement, so you can plan to avoid them.
Roadblock No. 1: Outliving Your Savings
In a recent poll from Allianz Life Insurance Company, a majority of people approaching or in retirement feared running out of money more than death! Knowing how long you'll live is one of the big mysteries of retirement planning. Thanks to healthier lifestyles and medical advances, life expectancy is increasing. Once you reach age 65, the probability you'll live for 20 or more years is good. And if you reach age 80 or 85 and are in good health, there is still a high probability of living 10 to 15 more years.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Roadblock No. 2: Underestimating How Much Income You'll Need
How much money will you need to live comfortably once you retire? It's a question on every retiree's mind—and a hard one to answer because there are so many variables, such as inflation, stock market performance and unexpected medical expenses.
But this is your life and your retirement. It's critical that you come up with a good estimate of your number to eliminate at least some of your uncertainty. How do you identify that number? The answer lies in your replacement ratio—the percentage of pre-retirement income that will provide you with the same standard of living in retirement. On average, a ratio of about 75% to 80% of your preretirement income is a good starting place. Then, make adjustments based upon decreases in former expenses (e.g., a paid-off mortgage) and any increases in future expenses (e.g., travel). Finally, it never hurts to underestimate income and overestimate expenses or plan for the unexpected (e.g., medical expenses).
Roadblock No. 3: Poor Returns Early in Your Retirement
Investment portfolios naturally rise and fall, but planning on a 6% long-term return is standard, right? Kind of. There is a "sequence of returns" risk associated with an ebb in portfolio value early in retirement. In this case, even if the returns do average what you expect in the long run, the early returns might not sustain your planned lifestyle and cause a diminishment of your base and later returns.
Precautions for this potentiality include counting on a lower withdrawal—say, 4% annually. Belt-tightening during a temporary down market can help as well. You can also consider insurance products that provide guaranteed income or set aside money in conservative financial vehicles to use in case of negative portfolio returns.
Roadblock No. 4: Taking Social Security at the Wrong Time
Should you claim Social Security benefits when you retire, at full retirement age or later? Think you understand Social Security well enough to answer that question? Think again. Retirees are leaving thousands upon thousands of dollars on the table by claiming too soon or failing to coordinate benefits with their spouse.
Several factors that determine the optimum time include your spouse's earnings, when you'll stop working, your savings and your health. Even if you and your spouse are both healthy, normal life expectancy may have one spouse expecting to live longer, so it might be prudent to plan for those potential alone years of a surviving spouse.
Roadblock No. 5: Ignoring the Impact of Inflation
It's important to consider how the value of your money might affect your expenses over time. If you don't factor in the increasing cost of an otherwise steady lifestyle, you will find your savings diminishing as the cost of goods and services increase. The only other alternative is to have an ever-decreasing lifestyle—not a pleasant thought, especially as you consider the challenges already built into our waning years. Planning on 4% inflation—the upper end of the 2% to 4% average over the last several years—could give you more leeway in your planned lifestyle for the duration of your retirement.
Taking these roadblocks seriously can go a long way toward putting you on the path to financial independence.
Scott Dougan is a Registered Financial Consultant, Investment Adviser Representative, licensed insurance professional and founder of Global Plains Advisory Group of Prairie Village, Kansas.
Investment advisory services offered through Global Financial Private Capital LLC, an SEC Registered Investment Adviser.
Steve Post contributed to this article.
Disclaimer
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
-
Why Vanguard Was Ordered to Pay a $106 Million Fine Related to Target-Date FundsVanguard's fine centers on December 2020 actions related to the asset manager's target-date funds and capital gains taxes. Here's what you need to know.
-
Nvidia Stock Up After President Trump Revokes Biden AI OrderNvidia stock is higher Tuesday after President Trump revoked a 2023 executive order targeting AI developers. Here's what we know.
-
Getting Divorced? Beware of Hidden Tax Traps as You Divide AssetsDividing assets fairly in a divorce means looking beyond their current values and asking whether they'll create tax liabilities — or tax breaks — in the future.
-
A Social Security Storm Is Gathering: Here's Your Safety PlanIf Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
-
How to Avoid These 10 Retirement Planning MistakesMany retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
-
Before the Next Time Markets Sink, Do Your Lifeboat DrillsAn eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
-
This Late-in-Life Roth Conversion Opportunity Spares Your HeirsExpensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
-
Women, What Is Your Net Worth?Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
-
15 Reasons You'll Regret an RV in RetirementMaking Your Money Last Here's why you might regret an RV in retirement. RV-savvy retirees talk about the downsides of spending retirement in a motorhome, travel trailer, fifth wheel or other recreational vehicle.
-
Converting Retirement Savings to a Roth IRA? Don't Do ThisYou might want to convert all of your savings to a Roth in one go, but you could end up paying hundreds of thousands more in taxes than you have to.
