You’ve been working, day in, day out, year after year, for decades, and now you’ve finally reached the milestone of retirement. Now that you’ve clocked out for good, if you thought you’d finally reached the end of your years of saving, investing, calculating, and planning, you’d be wrong. With all the changes that come along with your transition into your golden years, one thing that shouldn’t change is financial planning. To enjoy the fulfilling retirement you’ve been working toward all this time, you must continue to make decisions, take actions, and strategize.
During the first 10 years of retirement, we’ve found that most retirees face the same 5 financial planning challenges. Let’s discuss these challenges so you know what to do when it’s your turn.
1. Not Creating A Withdrawal Strategy
You’ve saved for years, and now you need that money to live on. How you take it out is just as important as how you put it in. That’s why you should capitalize on your wealth by determining a tax-efficient way to withdraw funds in your golden years.
Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s get taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different than your ordinary income tax rate.
Calculating when might be the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill when you’re trying to stretch your money for decades.
Create a withdrawal strategy with the help of a trusted professional who can help ensure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.
2. Throwing The Budget Away
Many people spend their retirement years doing all the things they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.
It’s easy to underestimate the amount of money you’ll spend during those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy and then create a budget, tracking your money along the way so you stick to your goals.
3. Ignoring Inflation
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This can do more harm than good as it can lead to inflation risk.
The long-term average inflation rate for healthcare expenditures is 5.28%, (1) compared to the current average inflation rate of 2.3%. (2) What does this mean? Retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs.
As tempting as it may be, resisting the urge to worry about short-term stock market volatility may be a good option. With a retirement that could easily last 20 to 30 years, inflation is still a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between principal protection and growth.
4. Neglecting To Create An Emergency Fund
Could you comfortably pay for an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
Most professionals recommend that retirees have at least 12 to 18 months of expenses in an easily accessible savings account. (3) This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it can provide stability during economic downturns. This means you can optimize your portfolio to help beat inflation, as suggested above, while having a safety net to fall back on.
There are other factors that should be considered in determining how much of an emergency fund to maintain including; pensions, other guaranteed income streams and your minimum required distributions. Working with a professional can help you determine how much of an emergency fund to maintain given your specific situation.
5. Planning On Your Own
When tackling any challenge, you know that the best outcome results when you seek out the professional most qualified. You turn to a doctor for health concerns. You turn to a mechanic for car trouble. So although you might have handled your personal finances on your own up until now, retirement is not the time to wing it. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up or one you can’t outlive.
Our HBA Wealth team would love to be the qualified professionals you turn to when facing the above challenges (and others) on your journey to a comfortable retirement. Contact us at (626) 529-8347 or email Ricky directly at firstname.lastname@example.org to get started!
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at email@example.com.
The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Haydel Biel & Associates or performance returns of any Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.