Daydreaming about retirement likely brings up a range of emotions: excitement, joy, maybe even anxiety or nervousness. Reaching the milestone of retirement is an amazing accomplishment, but making sure you’re prepared for it can be overwhelming—especially if you look at all the unknowns (and not just the benefit of more time for traveling, hobbies, and family). The good news is that there are ways to plan for many of the risks and headaches that accompany retirement. Let’s discuss some retirement planning challenges so you can feel empowered to either prevent or overcome them.
How’s Your Asset Allocation?
At retirement, the last thing you want to experience is losing a large portion of your investments due to a misallocated portfolio. It’s important to make sure your assets are handled carefully to make sure you have money for the long haul.
That’s why it’s crucial for your money to be allocated based on your age, time horizon, and personal risk tolerance. Someone who is 20 years away from retirement and okay with losing 15% of their money is going to have a portfolio that looks very different from someone who is retiring in 5 years and isn’t willing to lose more than 8% of their savings.
We also advise segmenting different “buckets” of money to coincide with expected income needs in retirement. This planning tactic can make it much easier to accommodate varying time horizons, as well as properly structure investment risk. A financial professional can walk you through the process of determining exactly what level of risk you want to take and can afford to take, how much liquidity you need, and help you design a portfolio customized to your needs.
The Reality of Inflation
Inflation is a reality; not planning for inflation is the risk. Social Security factors in inflation through the Cost of Living Adjustment (COLA) and will adjust based on your working years, but how can you protect your other assets? There are many ways to reduce the risk of inflation, such as diversifying your assets appropriately to strike a balance between principal protection and growth or making a conservative withdrawal plan that accounts for inflation surges in the future. The best way to prepare for the impact of inflation on your retirement savings is to plan for multiple scenarios, seeing how your nest egg will hold up under different circumstances.
For example, healthcare inflation tends to be higher than general inflation rates, although we have seen a recent decrease in the last few months. (1) If you end up having higher healthcare expenses in your latter years, your savings could decrease quicker than you expected. Preparing for this contingency by saving more, spending less, and reworking your retirement budget could go a long way toward protecting your hard-earned money.
Planning for inflation isn’t always best achieved by assuming a flat rate. We often say there are 3 phases to your retirement life: the Go-Go years, the Slow-Go years, and the No-Go years. Household spending tends to stay elevated in the Go-Go years, go down in the Slow-Go years, and sometimes move back up again in the No-Go years (primarily due to healthcare). It’s also important to factor in future spending changes; paying off the mortgage for example.
Outliving Your Savings
Perhaps one of the most overlooked items in a retirement plan is your income plan, or lack thereof. We work so hard to get to retirement that we forget to make a plan for how to handle our money after. Think of it this way: When you climb a mountain, you spend the bulk of your time preparing and strategizing for how you will get to the top (in this case, retirement). But once you’re up there, you realize you didn’t plan for the descent (withdrawing your money in retirement) and are not sure if you will make it to the bottom safely.
Having your money last as long as you do requires extensive planning to create a concrete income strategy that is designed to act as a personal pension. This is based on your needs, wants, savings goals, and unique lifestyle factors, which means a cookie-cutter strategy or withdrawal rate won’t give you the security you desire. A financial professional familiar with your situation can help you retire and stay that way!
Don’t Let These Risks Get You Down
You’ve worked long and hard to reach retirement, and you want to look forward to this next chapter with confidence and excitement rather than fear or dread. That’s why it’s essential to do more than just save and invest; you need to look at the big picture and prepare for the many variables that could come up.
You and your challenges are unique, so a one-size-fits-all plan just won’t do. If you’re looking for effective strategies tailored to tackle the financial challenges you face in your everyday life, we at Pathway Financial Planning are here to help. Let’s discuss your goals, obstacles, and plan for the intricacies of retirement to help you achieve the golden years you’re dreaming about. Contact us for an introductory appointment by calling 765-698-5121 or emailing info@pathwayplanners.com. We look forward to hearing from you soon!
About Ben
Ben Harvey is president and senior financial planner at Pathway Financial Planning, Inc., an independent, comprehensive financial planning firm that prioritizes the client, each and every time. He is recognized as a Retirement Income Certified Professional (RICP®) by The American College of Financial Services.
Ben spends his days staying on top of what’s going on in his clients lives, coordinating the financial planning process, helping people identify their goals, and evaluating whether they are on track. He designs and implements customized strategies all as part of the proprietary process, The Path to Purpose FORMula™. Ben has 15 years of experience in the financial industry, including years as a loan officer, trust officer, and financial advisor, and provides a unique skill set of business management, retail lending, estate and trust administration and planning, comprehensive financial planning, and wealth management.
Outside of work, Ben enjoys spending time with his wife, Mandy, and their children, Cooper and Claire. They are active in their church, and especially love traveling, hosting friends and family, going to amateur sporting events (especially high school basketball and swimming), and experiencing different cultures. On occasion, you can find Ben playing golf, sometimes in amateur tournaments, which he credits for teaching him patience. He will also tackle the occasional home improvement project, read non-fiction, and watch documentaries. Through experience and “honey-do lists,” Ben has learned to never start a project he’s not ready to finish. To learn more about Ben, connect with him on LinkedIn. You can also register for his recent webinar, Retire with Purpose: An Easy Strategy to Simplify Your Distributions.
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(1) https://ycharts.com/indicators/us_health_care_inflation_rate