Conquer 7 Retirement Challenges

Apr 30

When you think about retirement, you might imagine relaxing beach vacations. But, as the graph below shows, many people feel anxious about their money during their golden years.

Source: | Aegon Retirement Readiness Survey 2021

It's normal to feel overwhelmed by the need to organize your finances. But, by taking steps now, you can greatly reduce this stress. You'll gain peace of mind as your retirement nears.

Depleting Your Retirement Funds

One of retirees' biggest worries is outliving their savings.

It's a valid concern. Nearly 40% of Americans have less than $5,000 saved for retirement. People are living longer. Social Security is uncertain. So, it's crucial to plan for a longer retirement.

While you can “DIY” if you have the time, energy and expertise, you may want to consult a financial advisor. Financial advisors focus on planning for retirement using a number of different methods, but all with the same goal of helping you achieve your desired retirement income.

Debt During Retirement

More and more people are entering retirement with debt. In fact, households between 65 and 74 years old have an average debt of $105,250. If they own a home, the mortgage debt averages $190,441. This amount of debt can really strain your retirement finances.

You should consider paying off high-interest debts before you retire. These debts include credit cards or loans with high rates. It's also important to have a plan to manage and pay off any remaining debts in retirement. This plan should include setting a budget to free up cash flow to pay down these debts. A solid debt reduction strategy will let you start retirement on stronger financial footing..

Investments Falling Short

You may be saving well for retirement. But there’s the worry that your investments might not grow enough to support you later.

The stock market can be unpredictable. In the early stages of the COVID-19 pandemic,equity markets suffered sharp downturns due to the uncertain outlook. Equity market volatility may cause an undesired emotional reaction, which may cause investors to ill-timed changes to their portfolios..

To handle this, you need a good investment plan with a clear strategy that is well-diversified across different types of assets. This helps balance risk and minimize downside risk to your money as you approach retirement.

Also, watch out for high fees on your investments. High costs can reduce your returns over time. In many cases, choosing low-cost index funds or ETFs can reduce costs and ensure more of your money stays invested.

By making these smart choices, you can help ensure your investments meet your needs.

Escalating Healthcare Costs

One of the biggest concerns as you plan for retirement is the rising cost of healthcare.

A couple might need almost $300,000 to cover medical expenses in retirement. These costs are increasing faster than general inflation. This means you might need even more set aside for future healthcare needs.

You have several options to address these escalating costs. You might consider buying long-term care insurance. You can also maximize your Health Savings Account (HSA) contributions. HSAs are very helpful. They let you invest pre-tax money and use it tax-free for medical expenses. This helps your savings grow and stretch over time.

Discussing long-term care options with a financial advisor when you are in your 50s or early 60s is a good idea. If you decide to buy insurance, doing so by age 65 is typically ideal. This allows you to balance costs and benefits. These steps can reduce worries about healthcare costs, which can eat away at your retirement savings.

Coping with a Spouse's Death

Losing a spouse is not only an emotional blow but also a major financial challenge. This loss can decrease your income from sources like Social Security and pensions. You might also face higher taxes. This is because you'll switch from filing as a married couple to filing as a single person.

During working years, having appropriate life insurance coverage is key to preparing. It can help replace lost income, cover expenses like mortgages, and keep you financially stable. It’s also important to know your income sources. These include Social Security survivor benefits and pension details. This can help you know what to expect.

Other strategies include reducing expenses, which might include moving to a smaller home. By reducing expenses, you free up cash flow and you have more financial flexibility.

Discussing options with a financial advisor can help you adjust the strategies. You can adjust them to fit your needs. It will also help you manage money after losing a spouse.

Higher Tax Burden

If you are in your 70s, you need to consider the tax impact of required minimum distributions (RMDs). RMDs come from your tax-qualified retirement accounts, including 401(k)s and IRAs.

RMDs are mandatory withdrawals that the IRS requires you to start taking in your 70s (the exact age varies based on when you were born). Managing these withdrawals is crucial. They can greatly impact your taxes and how long your retirement savings last.

It's important to plan well in advance of your age that you have to start taking RMDs. Not doing so can push you into a higher tax bracket, increasing what you owe each year. For example, you might consider a Roth conversion strategy or qualified charitable distributions. This can help keep your taxable income in a lower bracket.

Also, timing withdrawals to cut taxes and make savings last in retirement is delicate, and may benefit from professional advice. Consulting with a financial advisor who understands the nuances of RMDs can be a wise step.

Inflation Impact

Over time, inflation can significantly reduce purchasing power. This means what you can buy with your retirement funds today won't stretch as far in the future.

For example, at a 3% inflation rate, your money's value could be cut in half in about 24 years.

To guard against inflation, add investments likely to grow faster than inflation to your portfolio. As you near retirement, your focus should shift to protecting the money you've saved. However, you still need to keep up with inflation.

Choosing the Right Retirement Financial Advisor

Working with a financial advisor can be incredibly beneficial when you're considering retirement. They help you create a plan to ensure you have the resources needed during retirement. Not all advisors are the same. So, it’s important to find someone qualified and with whom you feel comfortable.

A retirement financial advisor is a professional who helps you plan and manage your retirement finances. This term can include many financial professionals. It includes CPAs, CFPs, and investment managers. Before hiring one, you need to understand the type of advisor you need and the services they provide.

Advisors can guide you through all parts of retirement planning. This includes saving, investing, budgeting, and spending. They also help with estate and long-term care planning. Some specialize in areas like investment management or tax planning. Others take a comprehensive approach, considering your whole financial situation.

Here’s what a good retirement advisor should offer:

Financial planners help you create a personalized plan to meet your retirement goals. This plan covers saving, investing, and managing debt.
Investment management: Advisors can help you choose the right investment for your retirement portfolio. They will guide you in rebalancing it as you near retirement.
They can help cut your taxes in retirement, especially on your retirement income.
Estate Planning: A good advisor will help you plan for your legacy. This includes making wills, naming beneficiaries, and setting up trusts.
Advisors review various insurance options. They develop plans to cover long-term care expenses.

Key Steps to Finding the Right Retirement Financial Advisor

Before hiring an advisor, consider the advantages and challenges. The main benefits are peace of mind, guidance, motivation to save, and convenience. However, the costs and potential conflicts of interest are factors to weigh. You also must rely on someone else and give up some control.
When looking for a retirement financial advisor, keep these steps in mind. They will help you find the right fit for your financial needs:
Identify your needs. Do you need general financial advice or help with specialized retirement planning? Choose an advisor who focuses on the specific areas you need assistance with.
Evaluate their investment philosophy. Check that the advisor's approach and style are clear. They should match your expectations.
Check their credentials and experience. Ask about the advisor’s qualifications, certifications, and experience in retirement planning. This ensures they have the necessary expertise to manage complex retirement issues.
Understand the fees. Learn how the advisor charges for their services. It may be an hourly rate, a percentage of assets, or a flat fee. Clear this up early to avoid any surprises later.
Seek referrals. Ask friends or family who have used a retirement advisor for recommendations. This can lead you to a trusted professional. They have proven their services to be effective.
Interview Several Advisors: Don’t settle on the first advisor you meet. Interview multiple advisors to compare their qualifications, experience, and fees. This will also help you gauge if their personality is a good fit. A fit for a long-term professional relationship.

Key Takeaways:

Financial Stability in Retirement: Retirement is relaxing but can bring money worries. Proactive planning can reduce this stress and ensure a secure future.
Preserving Your Savings is key. Many Americans have little savings, and outliving their funds is a real concern for them. Investing in annuities like QLACs provides steady late-life income. Getting tailored advice from a financial advisor is helpful.
Debt management in retirement is a growing problem. Retirees are facing debts that strain their finances. Focus on clearing high-interest debts and strategically managing remaining debts with planned budgeting.
Ensuring Investment Performance: Investment unpredictability can threaten retirement stability. Diversify investments and opt for low-cost funds to protect your savings.
Handling Rising Healthcare Costs: Escalating healthcare expenses can deplete retirement funds. To offset these costs, consider long-term care insurance and maximize HSAs. Early consultation with a financial advisor about insurance options is key.
Losing a Spouse's Financial Impact: It can disrupt your finances. Having adequate life insurance and understanding potential income changes are critical. Consider downsizing to manage expenses better.
You need to manage RMDs starting in your 70s. If you have large tax-qualified accounts such as pre-tax 401ks or IRAs, you should plan for RMDs. This can help minimize taxes.

Bottom Line

While retirement planning can seem overwhelming, having a strong plan can reduce stress. Preparing for risks and making strategies to manage them can secure a stable retirement.

Regularly check your retirement plans. Consider getting advice from a financial advisor. They can help you make a plan that fits your needs. This is important. It keeps your retirement plans on track, and you secure as you near retirement. Ready to secure your financial future? Visit One Advisory Partners to find an expert retirement advisor. They can tailor a plan to your needs and ensure a comfortable retirement.