If you thought saving for retirement was tough, wait until you see what’s next for your nest egg.
The reality is that pile of money you accumulated won’t do you much good unless you can turn it into income that will last 20 years or more. And that means keeping a watchful eye out for all kinds of risks in retirement.
Having an income plan in place can help you battle the Big 4:
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.
1. Tax risk
Of course, your goal is to keep as much of your money as possible. But if you’ve been socking away savings in a tax-deferred retirement plan (such as an IRA, 401(k), 403(b), etc.), you have a silent partner in Uncle Sam. Withdrawals from those accounts — whether you take them in your 60s or when they’re required starting at age 70½ — will be taxed as ordinary income. It’s critical to have strategies built into your plan to keep the damage to a minimum. Talk to a financial adviser and/or tax professional about how you can manage your tax bracket each year — filling up the lowest bracket possible without spilling into the next. And keep an eye on how your deductions and exemptions may change once you retire — if you pay off your house, for example, or if you no longer own a business.
2. Inflation risk
Taxes take a bite out of your nest egg; inflation slowly erodes it. If you live on $5,000 a month right now, by 2027, you’ll likely need a little more than $6,700 a month to maintain the same lifestyle (based on a 3% rate of inflation). You can’t necessarily count on getting the same cost of living adjustments (COLAs) that you got when you were employed. Some pensions offer them, but many do not. And Social Security’s COLAs are unpredictable. To hold onto your purchasing power over the decades, you’ll have to build some inflation protection into your plan. Long-term, stocks may be your best inflation fighter — but they come with their own risks. Consult with your financial professional to discuss your specific needs and options.
3. Investment risk
A market downturn can devastate your nest egg — especially if you’re close to retiring or recently retired. It’s important to position your savings in a way that ensures you have sustainable, reliable income every month. The easiest way to think about it is as though your money is in different buckets.
- The first bucket is the money you’ll spend down through the first five years of your retirement. It should be filled with cash and safer investments. They may earn only 2% or 3%, but in the worst downturn, they shouldn’t lose more than 1%.
- The next bucket is for years six through 10. This money can be a bit more growth-oriented, but as you get closer to using it, you should become more conservative with how it’s invested … like bucket No. 1.
- The third bucket is for money you won’t need to touch for 11 or more years. Eventually, you’ll use it for income, but it can be invested more aggressively than the money in the first and second buckets, because if there’s a loss, you’ll have time to recover.
4. Estate and legacy risk
Your plan also should extend to the loved ones who will inherit your money. Proper positioning will help you leave a legacy without passing on any estate-planning snafus or excessive taxes to those who receive it. Talk to your adviser about how this applies to your retirement accounts, and if you should be looking at life insurance and other alternatives.
Your income plan is arguably the most important part of your comprehensive retirement plan. It will help you figure out what you need and where that money will come from. And when you reach retirement, it will help preserve the money you’ve worked so hard to save.
Kim Franke-Folstad contributed to this article.
-
5 Tips for Investing in the Trump PresidencyWith Trump back in office, expectations are high the bull market will continue. Here's how investors can prepare.
-
Where to Retire: Living in Portugal as a US RetireeLiving in Portugal as a retirement landing spot has abundant advantages, but do your homework and due diligence first.
-
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.
-
What a Second Trump Term Means for Investing in Water SafetyA new administration focused on deregulation could change the scope of today's water protections. So, what does that mean for the investors who support them?
-
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.
-
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.
-
What Is Your 'Enough Is Enough' Number for Retirement?Chasing a 'magic number' for retirement can be anxiety-inducing. Instead, build your plans around a personal number that reflects your individual circumstances.
