Throughout your working life, you have most likely been planning for and, on particularly challenging days, longing for the day you will retire. Even if you love your career, it’s normal for your thoughts to turn toward the exciting plans you have for this new chapter of your life. However, even if you have been diligent about setting aside the necessary funds for a comfortable retirement, it’s key that you continue to think strategically once you blow out the candles on your retirement cake. Below, I’ll discuss several common retiree financial challenges in the first decade of retirement – and how you can plan ahead to overcome them.
Challenge #1: Forgetting Your Budget
What do you want your golden years to look like? Are you traveling, remodeling, pursuing a passion project or investing in a hobby? Your retirement is the time to focus on what will bring you joy, but you don’t want to let that come at the cost of your financial security.
While many people are retiring later than they used to, they are also living for much longer. Your retirement savings may need to last for 20 or 30 years. That’s a long time, and maintaining a budget will help you ensure that you can spend those years without fretting over paying the bills. If you kept a budget while you were working, your retirement budget can mimic it. In place of income earned from your job, you will use whatever monthly income you plan to withdraw from your retirement savings, along with any money coming in from Social Security, pensions or other sources.
It’s important that you enjoy your retirement, but it’s more important that you have enough money to last you through this next chapter. Start developing your retirement budget right away – even before you actually retire, and make sure you track your expenses diligently.
Challenge #2: Not Accounting for Inflation
Having a budget is a great start in overcoming common retiree financial challenges, but there are variables you need to keep in mind, as well. Inflation can be a major wrench in any tidy retirement plan, posing serious retiree financial challenges. The inflation rate over the past two years has been staggering, and inflation in the U.S. is currently the highest it has been in 40 years.
Inflation is a difficult variable to forecast in your planning, but it is why your retirement plan needs to have some flexibility and extra financial padding. Don’t spend right up to your monthly limits if you can avoid it. Keep some funds in reserve for the unexpected rise in everyday costs.
While traditional advice has recommended that retirees stick with less risky investments, such as bonds and CDs, the stock market can be a useful tool to combat inflation. With the longevity of current retirements, stock market volatility may not be as damaging as it once was thought to be. In addition to that, there really is no other investment match for the power of compounding interest with stocks.
However, it’s important to make the right choice for your own financial situation and future goals. Consult a financial advisor who has the experience and knowledge to help you craft the right strategy.
Challenge #3: Withdrawing at Will
Did you know that how you take out your retirement savings is just as important as how you put your money in? Determining a withdrawal strategy is paramount to your planning and to overcoming common retiree financial challenges. It’s time to figure out how you will use all that money you set aside throughout your career. Withdrawing funds can be complicated, however. You will need to make sure that your withdrawal strategy is a tax-savvy one based on your retirement funds.
When it comes to traditional IRAs and 401(k)s, your money will be taxed at the current income tax rate when you withdraw it. For Roth IRAs and Roth 401(k)s, taxes are taken out beforehand. When you withdraw money from a Roth account, there are no additional taxes to be paid. What you have is, quite literally, what you get. Meanwhile, taxable investment accounts are taxed at the capital gains rate – a different rate than IRAs and 401(k)s. More information about the capital gains tax rate can be found on the U.S. Internal Revenue Service’s website.
You will certainly need to consider the tax implications of withdrawing from your account, and you’ll need to keep those in mind as you’re building out your retirement budget. Working with an expert who has navigated these retiree financial challenges before may help alleviate the stress and maximize the longevity of your savings without any nasty tax surprises
Challenge #4: Lacking a Safety Net
Even the best laid plans can be thrown into chaos by an unexpected expense, such as a major medical bill, car repair, a home emergency or more. Just as a budget carries over from your working life to your retirement, so does an emergency fund. Now that you are most likely living on an income that is fixed, you need to be protective of that nest egg.
The standard recommendation for an emergency fund is between three to six months’ worth of income. However, it would be wise for your emergency fund to cover 12 to 18 months of expenses. Here’s why: you will not have the same ability to recoup and refund that emergency fund as a working person would. It also gives you some stability should you want to keep some of your investments in the stock market.
Challenge #5: Going It Alone
Retirement should be an exciting time for you, but it can also be an overwhelming transition. It comes with its own set of complicated challenges, including the typical retiree financial challenges. However, you don’t have to navigate your golden years on your own. Bringing a financial expert into the mix can help you make the most of your savings and investments without leaving all the pressure on you to figure out tax laws, withdrawal strategies, and budgets.
If you are ready to start planning for a retirement that will last a lifetime, please contact us to start the conversation. At Resolute, we understand that each client has unique goals for retirement. Our aim is to partner with you to meet those goals and develop a sustainable approach to your financial future. Together, we can create the retirement plan of your dreams.