Retirement Planning Challenges
On our new client questionnaire, we ask all prospective clients this question: “Do you expect to outlive your money or your money to outlive you?” I don’t ever recall having someone answer that they expect to outlive their money. That is the key question, isn’t it? We all want to have to have enough to sustain us through our lifetimes. It’s for that reason that many of our Financial Plans and Client Reviews have included Retirement Feasibility Studies. There are a number of challenges facing current and future retirees. Below, we highlight some of the most pressing.
Underestimating Life Expectancy – Medical advancements have stretched life expectancies. Retirement nest eggs have to work harder and longer compared to previous generations. When running the aforementioned Feasibility Studies, illustrations are projected over a 30+ year joint-life expectancy (usually to age 95). The statistics seem to back-up that assumption. According to IRS life-expectancy tables, a couple retiring at the age of 65 have a joint-life expectancy of 26.2 years. In fact, according to the Society of Actuaries, there’s a 63% chance that one member of the couple will live to be 90 or older.
Underestimating Health Care Costs – According to Fidelity, a typical 65 year-old couple will need $230,000 to cover medical expenses in retirement (not including any long-term care costs). When determining a realistic income goal during retirement, these expenses should be factored in. Additionally, Medigap supplemental policies as well as long-term care insurance should be strongly considered.
Being Too Conservative with Investments – Rules of thumb suggest conservative investments (bonds, CDs, etc.) as you near retirement and begin to live off a “fixed income.” With today’s low interest rates, inflation will threaten the purchasing power of your assets over the longer-term.
Historically, equities have countered the effects of inflation over longer-term periods. A properly diversified portfolio includes a percentage of stocks. It seems counterintuitive, but holding a mix of assets (including historically “riskier” stocks) is more efficient and provides lower risk as compared to a portfolio of all bonds. The specific percentage of stocks depends on one’s age, risk tolerance, and how hard the money will need to work during retirement.
Paying Too Much in Taxes – Many of today’s retirees have only one category of retirement income (apart from social security) – usually in the form of a pension or work related retirement plans (IRAs, etc.). Generally, withdrawals from these sources are taxed at normal income rates, subject to the appropriate tax bracket. Additionally, at age 70½, Required Minimum Distributions (RMDs) must occur from IRAs, requiring receipt of taxable income.
Prior to retirement, investments can be made in various types of accounts – traditional retirement plans, Roth accounts, and individual investment accounts. Each have their own taxation based on current tax laws (e.g. ordinary tax, capital gains, tax-free). In retirement, income can be customized to reduce the overall tax burden, as well as to adjust to future changes in tax law.
Helping Out the Kids (or Grandkids) – Oh boy, a biggie. It’s difficult to watch heirs struggle, especially when it comes to educational expenses. However, if support comes at a sacrifice to your own financial independence, there won’t be much support in the future. As a general rule, annual withdrawal rates from a retirement nest egg above 5% are not sustainable over the longer-term. It’s been said, “you can take out loans for college, but you can’t take out a loan to pay for retirement.” (1)
Putting Off Planning or Relying on Family or Friends for Advice – Retirement planning is complicated and time sensitive. Decisions and options available “in the moment” are not always ideal. Trusted and competent third-party planning and guidance prior to a retirement decision is a must. Additionally, legal documentation (Wills, Trusts, and Powers of Attorney) are vital.
Beyond all the challenges, calculations, and Feasibility Studies, our interest as planners is to assist clients in identifying reasonable and attainable retirement goals – goals that result in money outliving the retirement.
(1) Quote and Article Source: “8 Money Pitfalls for Retirees” MainStreet on MSN Money.
All information is believed to be from reliable sources however we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Any market indices mentioned are unmanaged and cannot be invested in directly. Additional information, including management fees and expenses, is provided on our Form ADV Part 2. All investments involve risk and past performance is not a guarantee of future results.