Have you heeded the usual dire warnings about retirement? You may have made all of the necessary preparations, including saving enough to have a strong likelihood of living comfortably in your golden years. However, the economic and practical realities may be harsher than you expect. Consider these ups and downs that might hinder your plans:
1. The stock market could go down. People are quick to forget the hard lessons learned from previous stock market downturns—such as in 2008 and 2009, when the market lost about half of its value. Volatility in equities is inevitable and if the market drops while you're making withdrawals, the value of your retirement portfolio could plummet. Suppose you have a portfolio valued at $1 million and you anticipate withdrawing 5% a year, or $50,000 a year, during retirement. If your holdings drop 25% next year, you'll be left with $750,000—and that same withdrawal amount rises to almost 7% of the portfolio, a withdrawal rate that would be very difficult to sustain.
2. Your health care costs could go up. Some people think they'll have it made when they reach age 65 and become eligible for Medicare. While Medicare may reduce your health insurance outlays, you'll still likely need supplemental insurance, and there will be out-of-pocket expenses. And what if you need long-term care? In 2016, the average cost of a private room in a U.S. nursing home was $7,698 per month, according to the Genworth Cost of Care survey. That's more than $92,000 a year.
3. Inflation could go up. Inflation has been negligible during the past decade. Nevertheless, steep price increases could return quickly, and even if inflation doesn't spiral dramatically like it did during the 1960s and '70s, it's safe to assume that your expenses are likely to go up during your retirement years, while your savings may lose value. If you withdraw the same amount from your portfolio each year, expect that money not to stretch as far as it once did.
4. Your taxes could go up. You may expect your tax bill to go down during retirement because you'll likely earn less than you did at the peak of your working career. But various factors could result in higher-than-expected taxes. The tax break you likely got when you were contributing to your 401(k) and IRAs will end, and now you'll have to pay income tax on the money coming from those accounts. Up to 85% of your Social Security benefits, too, will be subject to tax if your income exceeds relatively low thresholds.
5. Your work earnings could go down. If you're like many people of retirement age, you may plan to work at least part-time well into your 60s or perhaps your 70s and beyond. But there are no guarantees. The work you've been doing might dry up, or you may no longer be able to meet the physical or mental challenges of the job. And, even if you have been healthy until now, that too could change as you get older.
6. Your retirement assets could go down. Just because you figure that you have enough on hand to ensure a comfortable retirement doesn't mean that your nest egg won't be eroded. For one thing, you must start taking required minimum distributions (RMDs) from qualified plans and traditional IRAs after you reach age 70½. (RMD rules don't apply to Roth IRAs.) The amount of your distribution is based on your account balance in the prior year and your life expectancy. There's no way to get around this, but you can postpone RMDs from an employer-sponsored retirement plan until you retire if you're still working for the company with the plan and you don't own more than 5% of the business.
7. Your stress level could go up. Any or all of these pitfalls could give you a lot more to worry about than you expected. What's more, you now may have to take on more decisions about how to invest your assets and how to structure your withdrawals.
However, you don't have to shoulder these responsibilities alone. Your financial advisors can work with you to help you overcome potential problems.
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