Alfa Pride Financial Blog
When planning for retirement people often have many misconceptions about what it takes to retire successfully and happily. Others are completely unaware of the major challenges or hurdles they must plan for to successfully do so. It requires careful planning and preparation to achieve a worry free retirement.
Of all the issues that you could face, there are five major ones that are the biggest killers of a successful retirement. First and foremost, your net worth becomes meaningless when you retire because it is how much income you can generate with it when you retire that matters most. U.S. states with a high cost of living can eat up a $1 million nest egg because the retiree never accurately calculated how much would be needed to retire comfortably.
People also aren’t aware that taxes can take a big bite out of their retirement income. If you have a significant amount of money saved in tax deferred accounts such as 401K’s and IRA’s, you are required to pay taxes on the distributions. This lowers the amount of income they can generate from those assets in retirement.
Most people think they will be in a lower tax bracket in retirement, but that is often not the case. So if $50,000 of income is needed annually, you would need to withdraw more than that from these tax-deferred accounts due to the taxes that would be imposed on them. You can minimize this risk by funding tax free sources of income such as a ROTH IRA or cash value life insurance policy.
Market volatility can severely impact your investment and retirement portfolio. A Forbes article from January 2020 explained that market losses in the first five years of retirement could shorten your portfolio income by 15-years. This could be disastrous to your overall quality of life. This often happens because people tend to take on risk more than they should based on their age. To address this issue, your age should match the amount of money you have in conservative accounts.
Longevity risk is another huge threat to retirement. This is the possibility of outliving your savings in retirement. To mitigate this risk you should plan for a long retirement and have a portion of your retirement funds in assets such as an income annuity that can provide guaranteed income for a specific time, or for the rest of your life. This step will take longevity risk off the table.
As a result of your health deteriorating, you may not be prepared for high healthcare costs in retirement. It’s one of the biggest killers of retirement income if you haven’t properly prepared for it. You could possibly lose the ability to perform two or more functions of daily living and require some form of long-term care which is expensive.
You should evaluate what your healthcare costs would be several years before retirement, and determine what options are available to manage them. Look into health savings accounts, employer sponsored plans for retirees and private Medicare insurance plans to determine if one, or a combination of those options are viable solutions for your health care needs in retirement. Purchasing long-term care insurance or some form of hybrid life insurance product that includes long-term care can help to minimize this risk.
There is no better time to re-evaluate your current situation than the present. Connect with a licensed financial professional at Alfa Pride Financial, to assess where you are on your financial journey, and get the financial keys to a worry-free life.