The Top 5 Financial Planning Challenges in the First 10 Years of Retirement
When do you plan to retire? Many people start to ask this question as they near that milestone, usually in their 50s. But when people plan to retire and when they actually retire don’t always align. According to a 2022 Gallup Poll, the average age of retirement in the U.S. is 61 years of age, however, most people say they expect to retire at age 66.
Considering that you may retire sooner than expected, it’s never too early to start planning for the next phase of your life. We’ve found that most retirees face the same 5 financial planning challenges during the first 10 years of retirement. Keep reading below for what you can do to overcome these challenges.
Not Creating a Withdrawal Strategy
Financial planning doesn’t stop once you enter retirement. Capitalize on your wealth by deciding the most tax-efficient way to withdraw funds in your golden years.
Different financial accounts are taxed at different rates. When you withdraw, traditional IRAs and 401(k)s are taxed at the ordinary income tax rate. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
As you can see, calculating the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill.
Create a withdrawal strategy with the help of a trusted professional who can make sure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.
Overspending in Retirement
Many people spend their retirement years doing everything they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.
It’s easy to underestimate the amount of money you’ll spend those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. My advice? Create a spending plan. Calculate your monthly income given your withdrawal strategy (see #1) and then create a budget.
Ignoring Inflation
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This can do more harm than good as it invites inflation risk.
Healthcare costs are the top retirement concern for Americans. Complicating things, medical care prices have generally grown faster than overall consumer prices. What does this mean? Retirees are more likely to feel the effects of inflation due to mandatory expenses, such as healthcare costs. Unanticipated medical expenses can derail years of retirement preparation.
So, as tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is still the biggest threat to your nest egg. Talk with us—we can help you strike a balance between protection and growth.
Not Having an Emergency Fund
Could you comfortably pay an unexpected, major expense in retirement without jeopardizing your financial future? For many, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
Having an emergency fund serves two purposes: it covers those unexpected expenses and provides stability during economic downturns. How much should you keep in this fund? A common rule of thumb is to have 3 to 6 months of expenses saved up in an easily accessible savings account, but retirement planning can be a little more involved than that. We commonly employ a “Bucket Strategy” to help clients optimize their portfolio to beat inflation (#3 on our list) while having a safety net to fall back on.
Going Through Retirement Alone
It took decades of strategizing to grow and protect your wealth up until this point. Don’t just “wing it” in retirement and manage your money alone. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up and having one you can’t outlive.
We’re Here for You
Planning for retirement can be a daunting task but it’s one of the most important things you can do to ensure you have the retirement you deserve and have worked so hard for. The good news is that you don’t have to face this challenge alone. At WealthBuilders, we help you prepare for the retirement years and walk with you through every step of the process so you can enjoy all your newfound free time without worry. To learn more about us and how we can help you, please call 715-386-3735 or email info@wealthbuilders.financial. We look forward to working with you!
About Dan
Dan Olsen is the president, founder, and wealth advisor at WealthBuilders, an independent financial services firm based in Hudson, WI. Before becoming a financial advisor, Dan had a nearly 25-year career as an on-air radio personality and spent several years in corporate America.
Dan helps clients build and manage their wealth to create a specific retirement plan and loves teaching them that being wealthy is about more than just money. Through his distinct collaborative approach, he provides the financial guidance and resources necessary to help clients move forward in life and put their values into action. He loves knowing he has a purpose and that his work and effect on people and their lives matters. Through his education and 20-plus years of experience in the financial world, he has gained extensive knowledge and expertise in the financial industry, including obtaining the Series 7, Series 66 held with LPL Financial and Life/Health & Accident insurance licenses.
Outside the office, Dan enjoys visiting the Great Lakes with his wife, spending time with his grandchildren, fishing (and ice fishing), listening to ’70s and ’80s music, and supporting charities that address food insecurity, especially with children. To learn more about Dan, connect with him on LinkedIn.