Retirement is a brand-new journey, unlike anything you’ve ever experienced. You are leaving behind the security and comfort of a steady paycheck and structured schedule and trading it for the unknown of finite resources and endless free time. It can be quite a shock to your system and may take a lot of time to adjust to a new way of life. You may be asking yourself if all your hard work will pay off.
While every stage of life comes with its own set of unique challenges, we’ve found that most retirees face the same 5 financial planning challenges during the first 10 years of retirement. Here are those challenges and what you can do to prepare for them.
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 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 Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free.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 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 we 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 5.4% increase in medical care services1 compared to the annual average inflation rate of 1.23%.2 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.
Most professionals recommend having at least 3 to 6 months of expenses in an easily accessible savings account.3 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 took decades of strategizing to grow and safeguard your wealth up until this point. Don’t just “wing it” in retirement and manage your money alone. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up and having one you can’t outlive.
At Infiniti Wealth Management, we are here to help you with all aspects of retirement planning. We can help you avoid making some of these mistakes and overcome the typical retirement planning challenges. To see if our services would be a good fit for your needs, call our office at 845-278-8638 or send us a message to set up a complimentary consultation.
Michael Durante is a founder, Certified Financial Planner™ (CFP®), and Certified Divorce Financial Analyst™ (CDFA®) at Infiniti Wealth Management, an independent, fee-only financial advisory firm. With over 25 years of experience, Mike specializes in serving women who are going through a life transition, whether that’s a divorce or the death of a spouse, as well as pre-retiree and retiree couples. He is passionate about helping his clients develop a personalized financial plan based on their values and goals so they enter retirement with confidence and peace of mind. Mike has both a bachelor’s degree in business administration and an MBA from Pace University. When he’s not working, Mike loves spending time outdoors hiking, biking, walking, golfing, campfires, the beach and doing yard work, as well as spending time with family and friends. Mike also enjoys to read, travel, and check out local restaurants and events. To learn more about Mike, connect with him on LinkedIn.
September 6, 2022 - Michael Durante, CFP®, CDFA®