About to retire? Kick your monetary fears to the curb
About to retire? Kick your financial fears to the curb
With markets remaining volatile, inflation rising, and taxes rising for wealthy taxpayers, a growing number of investors are expressing concern about their prospects for retirement.
A recent study on the Top Risks to Retirement Security addressed the top concerns of investors looking to retire in the next decade. More than half (56%) of respondents say they are concerned about spending too much and running out of money when they retire, with 53% worrying about losing money in their retirement accounts due to a sharp stock market decline.
In a separate survey, nearly 60% of financial advisors find that clients need to amass more cash to have a financially secure retirement, but many are still too close to retirement to take the risk of investing in high risk / high yield financial assets Products.
Ironically, longevity, the desire for a long and fulfilling life, is also one of the greatest risks to retirement savings. Longevity risk relates to the possibility that retirees will reach such an advanced age that they will have to use up their retirement savings and rely solely on Social Security to cover their essential expenses for housing, health care, food, clothing, and transportation. While Social Security offers lifelong benefits, keep in mind that it is only expected to replace around 40% of the average earnings of a retired worker. For most retirees, this would leave a significant gap between the income they receive and the income they need to meet all of their life goals.
While surviving their retirement savings is a very real risk for many Americans, there are a number of steps you can take now to replace retirement worries with confidence. That starts with working with an independent advisor who can help you create a plan that seamlessly brings together all of the elements of wealth planning, including the four key areas discussed below.
1. Risk management
It is important at every stage of life to recognize potential risks that could prevent you from achieving your goals. This is why you insure your home, your car and your business. That’s why you protect your income – and the people who depend on your income in the event that something happens to you – with disability and life insurance.
Risk management is also an important part of your investment strategy. Are you taking too much or too little investment risk because of your financial goals, time frame and tolerance of market fluctuations? A strategy that is too risky can result in losses that are not easily recoverable, especially for investors who are or are about to retire with shorter investment periods. It can also lead to poor decision making, such as selling stocks when stock prices fall and then buying them back when prices rise again. Too conservative a strategy can also have dire consequences if investment returns cannot keep pace with inflation over time.
This is why maintaining a disciplined investment process is so important. A consistent and repeatable process provides an orderly way to create and maintain a portfolio that is aligned with your specific goals while attempting to manage investment risk. If you don’t already have a plan, consider working with a trustee to develop a strategy that will get you on the right track to meet your goals.
2. Tax planning
Taxes on retirement are complicated. If not managed properly, they can be a huge drag on your retirement income. Tax planning should begin during your employment relationship to ensure that you are maximizing benefits such as employer’s retirement savings and receiving the maximum tax benefits on various types of compensation, including salaries, bonuses, and stock options.
As you approach retirement, it is important to have a plan for how you will receive your retirement income. A tax efficient payout strategy will determine which accounts you use and in which order to optimize your income and tax burden. Tax-smart strategies are also important in fulfilling your inheritance during your lifetime and transferring wealth to your heirs after your death. Your financial advisor can work with you and your CPA to ensure you have a plan to manage taxes now and during retirement.
3. Debt management
Retiring with significant debt – especially through personal loans or credit cards – can be challenging. When interest charges are incurred, they can make the balances bigger and more difficult to repay. For example, if you have $ 1,000 in balance over six months, you would be spending about $ 47 on interest if your card has an APR of 16%. According to US News, if you have the same balance but 20% APR, you will pay about $ 59 in interest over the same period. What feels like small amounts now can affect your income over time. This is because debt is effectively “subtracted” from the income you receive from social security and other sources in retirement. A mortgage, the most common form of debt among retirees, can also limit your financial flexibility in retirement.
Ideally, you want to pay off all revolving credit card debt and personal loans before you retire. Your financial advisor can work with you to come up with a plan to contain spending and manage debt as you prepare for retirement.
4th Estate planning
Estate planning is a central part of the wealth management process. Without the right legal documents to protect your loved ones and your assets, in the event of your death it can be left to a court to rule on your assets or to appoint a guardian for underage children. However, estate planning is about far more than what happens when you are away. It is about protecting your interests during your life, including those who make important decisions about your living conditions, medical treatment, and terminal care when you cannot make those decisions yourself because of temporary or permanent incapacity for work.
A comprehensive estate plan typically involves a variety of documents, including a will, living will, revocable living trust, permanent power of attorney, and more. Life insurance, retirement plans, and business plans (if you own a business) can also be included.
It’s important to work with your financial, tax, and legal counsel to come up with a plan as soon as possible to protect your life and heritage. If you already have a plan in place, make sure you and your advisor review it regularly and whenever circumstances in your life change or state or federal tax laws change.
If you are stressed or worried about how financially prepared you may be for retirement, you are nowhere near alone. Retirement is a major lifestyle change. However, facing your fears and worries is the first step in finding a confident path to the life you want for the decades to come. To learn more about how to overcome worry and anxiety about your retirement, download 8 Mistakes To Avoid In Retirement.