Calling all retirees and soon-to-be retirees! If you’re somewhere between the ages of 55 and 75, give yourself a round of applause—you’re in the retirement red zone! It’s the magical 5-to-10-year period before and in retirement that’s supposed to be filled with golf, cruises, and everything else that makes life worth living. But beware, my friends, because the retirement red zone can also be a scary place, where one misstep can ruin your golden years. So, to keep your retirement dreams alive, here are 5 common risks that often pop up in this zone—and how to avoid them.
If you’ve managed to amass a significant nest egg, you have reason to be proud of yourself! But even if you have a million dollars saved, it may not be enough. If you plan to retire in your early or mid-60s, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as healthcare costs, home maintenance, and taxes.
The best way to avoid financial anxiety in retirement is to map out various retirement scenarios to see what your savings can handle. We routinely review these scenarios for our clients. Knowledge will empower you, especially in this situation. Once you have an idea of what you’ll need for your unique situation, set up contingency funds to cover the unexpected and find ways to maximize your savings to give yourself a cushion.
If you’ve ever held a hefty medical bill in your hand, you aren’t alone. The United States has one of the highest costs of healthcare in the world. And as you age, you will likely require more healthcare services.
According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will require $315,000 to cover healthcare costs in retirement. Most people don’t even have that much in their retirement accounts to live on, let alone to cover medical costs. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. For example, many people don’t realize that basic Medicare has no cap on out-of-pocket expenses. A supplement is required to achieve a limit on costs. Comprehensive insurance is more expensive but can cap unexpected expenses. If you plan to retire before age 65, be sure to get a pre-Medicare policy in place.
Just because you’ve worked hard to save for retirement and build up a nest egg doesn’t mean you can rest easy. Once you start tapping into your savings, you need to develop a strategy to withdraw your funds so they last the rest of your life, however long that may be.
Since the historical average return of the stock market is roughly 10% per year, you might assume that you can afford to withdraw that much from your portfolio each year. But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% – 5% or less. The market volatility of the last couple of years proves just how risky it is to bank on a 10% return every year. Since there is no simple, one-size-fits-all plan, your withdrawal strategy will need to be tailored to your unique needs, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.
Keep in mind that whatever withdrawal strategy you use, you will still need to consider the tax impact of your plan. Many people forget to plan for this crucial component and end up with less than they needed after taxes were paid. Make sure you are structuring your retirement plan in a tax-efficient way to avoid paying more than you have to during your golden years.
With talks of a looming recession, many people in the retirement red zone are fearful about how much downside risk their plans can handle. This is a valid concern given the market volatility of the last couple years. Here’s where tried-and-true investing principles come into play.
Diversification is one of the most talked-about investment strategies for a reason: it can help to address market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings.
It is important to evaluate your portfolio’s current allocation. You may need to rebalance or diversify your positions. Look at the big picture of all your accounts to ensure you are diversified across the board. It may also be helpful to consider a flexible withdrawal strategy which involves withdrawing less (and spending less) in the years where the market underperforms.
Losing your spouse is devastating, regardless of when it happens. But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income.
It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You can also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure that you are taken care of no matter what happens.
Congratulations on making it to the retirement red zone, where the stakes are high but the retirement dreams are higher! While retirement planning can be stressful, complicated, and risky, knowing the potential pitfalls can help you avoid them and keep your golden years shining bright.
At Wealth Advocate Group, we’ve got your back. We specialize in customized, tax-efficient retirement planning to help you navigate the twists and turns of retirement with confidence.
Don’t let the retirement red zone scare you off. Schedule a 20-minute call with us to see how we can help you reach your financial goals and live the retirement of your dreams. Call 440-505-5751 or email jcohen@Wadvocate.com to schedule an appointment.
Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence and freedom from worry. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.
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