6 Post-Retirement Concerns That You Need To Prepare For

Posted by Jim Kantowski, CFP®, CPA on August 29, 2022

6 Post-Retirement Concerns That You Need To Prepare For

Ideally, retirement should be a phase in life when you can enjoy more time to pursue your passions outside of work, like spending time with your family, traveling the world, or immersing yourself in your favorite hobbies. However, for many Americans, retirement is a time of financial stress—and the worry often begins during your working years. This is why it’s critical to understand common post-retirement concerns like how your money is taxed, or even worse, not having enough money, so you can plan ahead and live the lifestyle you desire in your golden years.

In this blog post, we’ll walk through six common retirement concerns and how you can prepare to avoid (or at least mitigate) them in an ever-changing economic landscape.

Are you looking for a retirement plan that will help you achieve your family’s most important goals in life? Schedule a call to find out how we can help.

6 Common Post-Retirement Concerns

Post-retirement concerns are pervasive in today’s society. Among Americans ages 50 to 74, only 33% have a formal retirement plan. It’s a state of affairs ripe with opportunity for improvement, and many people—even those with limited awareness of the issue—still have time to combat such concerns with financial planning.

So, what risks do you need to be aware of, and how can you mitigate them with a solid plan?

1. Managing Your Spending

Everyone’s retirement income needs are different; it all depends on the lifestyle you want to live. And it’s important to be realistic about that lifestyle. Burning through money too fast in retirement is indeed the top concern for many Americans, and managing your spending poorly or underestimating it is a major risk.

When your working years have ended, you’ve done most of your saving and have earned your pension. You also have no new employment income. So, where does that leave you?

While you may be able to tweak your investments in retirement, you shouldn’t rely completely on this strategy to get you out of a spending predicament. The good news is that managing your spending wisely works—in fact, it’s the biggest known driver of successful retirements.

Developing positive spending habits starts in your pre-retirement years, with some planning. Begin by thinking about how you spend now and what you might add or reduce during retirement: Do you plan to move, buy a new house, or travel? Do you have a new, expensive hobby you would like to pursue? Answering these questions will help you predict your income needs as accurately as possible and ensure your income streams can meet those needs.

Pro Tip: As the saying goes, change is the only constant in life. You may plan to buy a new house in retirement, but inflation could rise and mortgage rates could increase, as we’re seeing in today’s economy. While there are many aspects of life you can’t control, your spending is the number-one financial thing you can control, and managing it well can help you reach your retirement goals even in less-than-ideal circumstances.

2. The Performance Of Your Investments

Investing always carries some level of risk, and you can’t control the markets. However, you can control your portfolio to some extent. How? By clearly projecting the amount of growth and income you need to be able to generate in order to cover your living expenses without taking on too much risk. For example if you need 5% growth and income, you might have a portfolio consisting of 50% stocks and 50% bonds, whereas if you need 6 to 7% you may need to be a little more aggressive.

If you take too much risk you could put yourself in a dicey situation. Say, for example, you decide to retire and your investment portfolio consists entirely of stocks. If a year like 2022 comes around (the stock market’s worst six months in the past 40 years), you could end up with a portfolio that’s down 20% in value. If this happens right out of the gate when you retire, it decreases your likelihood of having a successful retirement. The financial term for this potential pitfall is “sequence of returns risk.

If you find yourself grappling with a sequence-of-returns situation, your best bet is to adjust the one thing you can control: your spending. Talk to your financial advisor about where you can cut down on your expenses, and how you can manage your taxes. After all, in the calculus of taxes, where you’re holding your investments and drawing them from could help reduce your expenses.

Also consider the 4% rule, which is the idea that if you have a diversified portfolio and you spend 4% of its total value annually, there is a 96% chance your money will last for 30 years. This is a good rule of thumb to follow.

Example: According to the 4% rule, if you have $1 million in your portfolio, you’d withdraw 4% ($40,000) in your first year of retirement. In the event that the stock market goes down the following year and your balance becomes $900,000, you’d adjust your spending and only withdraw $36,000.

The best way to reduce risky scenarios with your investments is to have a diversified portfolio, so all of your eggs aren’t in one basket. Invest in a mix of stocks and bonds. Moreover, don’t make any major changes to your portfolio when the market fluctuates. Above all, (with notable exceptions) the worst thing you can do is sell your stocks when the market is down. You don’t want to lock in losses and become more conservative, as you may never be able to recover. Having a portfolio that will generate the returns you need and allow you to sleep at night is a great way to invest.

3. Maintaining Income Streams

Social Security benefits are a key source of post-retirement income for 57% of Americans. However, 24% of Americans ages 50 to 74 are deeply concerned about potential cuts to these benefits. Pensions are another common income source, although they’re becoming less prevalent for younger workers. The bottom line is that it’s critical to think carefully about how you’ll fund your retirement with these kinds of income streams, and to not rely fully on them.

For instance, say your expenses in retirement are $70,000 per year. If you have a pension that pays you $50,000 and Social Security pays you $20,000, you can in theory cover your expenses with that amount of money. However, problems will arise if you encounter an unexpected event in your life, such as your spouse suddenly requiring long-term care, and your annual expenses increase to $100,000. You’d then need to figure out how to generate an additional $30,000 in income either through your assets or an insurance policy.

When looking at your pension, it’s important to consider your survivor benefit, which oftentimes is only 50%. If you were to pass away, would your spouse still be able to maintain their standard of living on half of your former pension income? If the answer is “no”, it’s a smart move to put an insurance policy in place to replenish your spouse’s assets. Note that you should do this before you retire, because the rates will be lower and you’ll likely be insurable.

4. Health-Related Expenses

Run-of-the-mill healthcare needs aren’t too significant a post-retirement concern, since you’ll have access to Medicare and you can get supplemental insurance policies at a reasonable cost, which cover most basic needs. However, long-term care expenses or the need to move into a nursing home are a much greater concern.

The decision whether or not to take out a long-term care insurance policy isn’t an easy one to make. It is an added cost in retirement that you hopefully will never need. If you don’t need to use the policy (and you may never have to), the premiums you pay are gone. But having a long-term care event can drastically hurt your financial situation and affect your spouse's standard of living or the amount of money you pass to your heirs.

Many people take out long-term care policies after they’ve seen a relative go through a long-term care event. They don’t want to be in a position to worry about money during a time when there’s already so much stress on their family, especially if relatives are geographically distant from one another. It’s important to note that this insurance has evolved over the years and there are new options available, such as purchasing a benefit tied to a life insurance policy.

As you consider the right decision for you, think about your family health history and run through different scenarios regarding what you might do if you or your spouse were to require long-term care. It’s worthwhile to be prepared.

5. Having Too Much Debt

Debt is an ever-present topic in our modern lives. While there’s a debate around whether or not you should have housing debt, what can really get you in trouble is debt with adjustable interest rates. This could include a large home equity loan or credit card debt.

In times when interest rates are on the rise (like nowadays), the cost of borrowing increases. This can put you in a bind if you’re living close to the edge of your spending limits, and it’s another reason why managing your spending with care is crucial.

6. The Death Of Your Spouse

The death of a spouse represents a major transition in life overall. And from an income standpoint specifically, it could really jeopardize your finances.

The key is to make sure you have enough assets to get by in the event of a death. If you have an income source that goes away with the death of a spouse, this could put you at severe risk of running out of money if you do not have enough assets to cover the reduction of income or an insurance policy to replace the income. If you plan in advance and put the right insurance in place, you’ll have solutions available to you.

Let Us Help Alleviate Your Post-Retirement Concerns

At Bay Point Wealth, our priority is to make sure you’re prepared for retirement—not only with a solid financial plan, but also with the insurance you need to protect yourself and your loved ones. We’ll walk through multiple financial scenarios together to create the best plan possible for your unique circumstances, and make sure you have enough money to live the life you want post-retirement.

In addition to working with you on financial strategies, we’ll also be there for you to lean on in times of change or difficulty—because our clients are like family to us. If you’re looking for expert financial advice along with compassionate service, schedule a call with us today.

Schedule A Call - Bay Point Wealth

Topics: Retirement Planning