5 Unexpected Threats to Your Retirement Plan
By Scott Peterson
Although much of life feels uncertain right now, the last thing you want to feel unsure about is your retirement savings. But when you think of things that could wipe out your nest egg, like market turmoil, a personal tragedy, or a natural disaster, remember that these events are largely out of your control. The real dangers to your retirement plan are the little-known and often ignored threats that could cause you to lose what you have diligently worked for. Let’s talk about 5 ways you could run into retirement trouble and how to help prevent them from upsetting your retirement.
1. Miscalculating Your Retirement Needs
If you’ve managed to amass significant savings, you should be proud of your accomplishment. But no matter the amount you have, you need to be sure it will be enough. If you plan to retire in your early or mid-60s, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as healthcare costs, home maintenance, and taxes.
The best way to avoid financial anxiety in retirement is to work with your financial professional to map out various retirement scenarios to see what your savings can handle. Knowledge will empower you, especially in this situation. More than 40% of those polled in the annual Transamerica Retirement Survey admitted they have only guessed at how much they will need for a comfortable retirement. (1) Once you have an idea of what you’ll need for your unique situation, set up contingency funds to cover the unexpected and find ways to maximize your savings to give yourself a cushion.
2. Rising Healthcare Costs
If you’ve ever held a hefty medical bill in your hand, you aren’t alone. American healthcare is more expensive than in any other developed country. (2) And as you age, you will likely require more healthcare services. According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $73,000 to $270,000 in healthcare costs in retirement. (3) Most people don’t even have that much in their retirement accounts to live on, let alone to cover medical costs. Without your employer’s health insurance, adequate coverage is typically more expensive and harder to find. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. For example, many people don’t realize that basic Medicare has no cap on out-of-pocket expenses. A supplement is required to achieve a limit on costs. Comprehensive insurance is more expensive but can cap unexpected expenses. If you plan to retire before age 65, be sure to get a pre-Medicare policy in place.
3. The Reality of Inflation
You’re hearing a lot about inflation these days, and it’s time to pay attention! Inflation is a reality; not planning for inflation is the risk. Social Security factors in inflation through the Cost of Living Adjustment (COLA) and will adjust based on your working years, but how can you protect your other assets? There are many ways to reduce the risk of inflation, such as diversifying your assets appropriately to strike a balance between principal protection and growth or making a conservative withdrawal plan that accounts for inflation surges in the future. The best way to prepare for the impact of inflation on your retirement savings is to plan for multiple scenarios, seeing how your nest egg will hold up under different circumstances.
4. Forced Early Retirement
It’s no secret that life can throw unexpected curveballs at any time and derail your plans. The same can happen to your retirement. Almost 50% of retirees end up retiring earlier than planned, for reasons stemming from disability to company changes to health problems. (4)
And in a time of employment uncertainty brought about by a global pandemic and political division, you need to have a contingency for if your best-laid plans fail. Even if you want to work longer and save more, there’s no guarantee that you’ll be able to. Early retirement can destroy even well-laid retirement plans because the loss of income during the final years of your career can spell financial disaster.
To help protect against this risk, plan for the unanticipated. Make sure you have adequate disability insurance to protect your income in the event of an illness or disability. You can also work with an advisor to create scenarios and see what your savings and income would look like if you were forced to retire early.
5. Premature Loss of a Spouse
Losing your spouse is devastating, regardless of when it happens. But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income.
It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure that you are taken care of no matter what happens.
Prepare for These Threats (and Others)
Thanks to the never-ending unpredictable factors that go along with retirement planning, the whole process can be stressful and complicated. The good news is that understanding some of the risks and common roadblocks you may experience helps you plan ahead for the unexpected and reduces the chance that your retirement plan will fail.
Our goal is to help you build a more stable retirement. With our comprehensive planning process, the Peterson Wealth Management team can help you prepare for life’s expected and unexpected circumstances. If you think your retirement plan needs a second look, schedule your no-fee consultation now!
D. Scott Peterson is an investment advisor representative and the founder of Peterson Wealth Management. With over 30 years of experience, Scott is passionate about helping clients maximize their money and create a nest egg that allows them to find financial security. He is known for his loyalty to his clients, going the extra mile to make sure their financial plan and strategies are still on track to achieve their goals. Scott started Peterson Wealth Management in 2004 because he wanted the freedom to put his clients first and serve them in a way that would truly bring value to their lives. He graduated from Gustavus Adolphus College in Minnesota with a bachelor’s degree in American history and political science and holds a master’s degree in American history from Indiana University in Bloomington. He firmly believes that having an understanding of history helps him navigate the ups and downs of the markets and manage money through crises. When he’s not working, you can find Scott enjoying all manner of winter sports, especially hockey!