After years of working hard, experiencing job insecurity, grappling with peer pressure, dealing with familial responsibilities, and more, retirement can come as a breath of fresh air for most people. Retirement can be a time for you to relax, pursue your hobbies, live a slow-paced life, and reconnect with your loved ones. However, to live a comfortable retirement, you require a risk mitigation strategy that can keep you financially secure at all times for as long as you live.
Risks can arise at any time. Contrary to common notions, risks are not limited to your younger or pre-retirement days. In fact, the post-retirement risk is one of the significant points to focus on in your financial plan at all times. After retirement, several concerns like running out of your savings, not having a proper estate plan, lacking the means to overcome a health concern, and more may prove to be a point of concern. Creating a post-retirement strategy based on these risk factors can help you devise suitable strategies for a financially safe retirement and old life. Mitigating risks can also ensure that you are emotionally and physically content with your life after retirement. Life can change after you stop going to the office every day. And if you retire early, you can further increase the chances of running out of your savings or not being able to live your preferred standard of living in the face of inflation for the rest of your life. But you can avoid all of these concerns and more by creating a solid post retirement investment strategy and risk-mitigating plan. If you need help or guidance in coming up with such a strategy, you can consult with a professional financial advisor to advise you on the same.
Read on to know the various risks you can face in retirement and how to avoid them with sound financial strategies:
1. Financial risks in retirement
Financial risks can primarily include running out of funds in retirement. Considering the fact that you may start preparing for retirement in your 20s or 30s and ultimately retire in your 50s, 60s, or even 70s, the chances of miscalculations or misestimating your needs are high. While there are estimated figures on how much your retirement corpus should contain, your precise needs and wants will vary on a number of fronts. In addition to this, longevity also plays a crucial role in estimating your retirement corpus, along with your retirement age. For instance, if you retire at the age of 50 and live till the age of 80, you have a 30-year retirement to account for. However, if you retire at 65 and live till the age of 80, you have a 15-year retirement to account for. While no one can really predict their longevity, taking your family history in mind and looking at factors like your present health status can help. Typically, it can help to at least assume that your retirement will last 25 years. This can be an average figure that can help you prepare for retirement. Additionally, retirement planning considerations, such as not withdrawing most of your savings in your early retirement years, are also essential. A lot of people are swayed by the lump sum funds at their disposal. Living extravagantly and spending beyond your means in the early years of your retirement can deplete your funds for the later years. To solve this issue, you can consider purchasing an annuity. Annuities offer you a regular stream of income for as long as you live. This helps in better money management and eliminates the possibility of misusing or overspending your money before time. You can also consider bond ladders for investing money after retirement. Bond laddering puts your money in bonds of different maturity dates. This method offers good liquidity while helping you to distribute risk over time.
Another financial risk in retirement can be inflation. Inflation can take a toll on your savings. The amount of money you earn today may not be enough ten years from now. The same can be said for your savings. And while you can always aim for a high-paying job right now, you will not have the same option in retirement as you grow old. Hence, it is important to save strategically to ensure that your money does not lose its value. Inflation is perhaps the most significant risk that you can face in retirement. The rising costs of goods and services can erode your savings pool. One way to tackle inflation can be by investing in instruments that can deliver inflation-beating returns early in life. This can include stocks, equity mutual funds, gold, etc. In addition to this, investing money after retirement is equally vital. This can ensure that your savings do not sit idle and instead grow. You can consult a financial advisor to create an investment portfolio that focuses on capital appreciation even in your retired years. This is usually done by keeping the right mix of stocks and bonds.
2. Health risks in retirement
Your health can start showing signs of deterioration post-retirement as you start to age. The expenses associated with health issues can be a primary concern for retirees. However, you can prepare for these beforehand. Being financially prepared for retirement requires planning. This can be done with financial tools like health insurance, long-term care insurance, a Health Savings Account, Medicare, and more. Health insurance, like critical illness insurance, can be crucial as it can help you cover the high costs of treatment without dipping into your retirement savings. Another way to systematically save for health expenses in retirement is by investing in a Health Savings Account, also known as an HSA. An HSA is a tax-advantaged account that allows you to save for your health expenses in retirement. You can contribute your pre-tax dollars to the account and withdraw them tax-free for qualified medical expenses. Moreover, an HSA can be funded by both the employee and the employer, so you can enjoy dual benefits and better growth. You can open an HSA if you have a high-deductible health plan and no Medicare. You should also not have any other health coverage. Medicare can also be a good option in retirement. Medicare is a federal health insurance program and can cover retirees over the age of 65. There are four parts of Medicare – Medicare A, Medicare B, Medicare C, and Medicare D. You can automatically enroll for the first two parts if you also receive Social Security benefits. Part C includes Medicare Advantage plans that can be bought by private insurance companies. Lastly, Medicare Part D is optional and covers prescription drugs.
Apart from general insurance, you would also need to plan for long-term care or assisted living. Typically, health insurance plans do not cover these expenses. An illness, an accident, or just old age can bring forth the need for long-term care. There is a considerable lack of caregivers in the U.S. This, in turn, increases the cost of hiring a caretaker. Health financial planning is one of the most important components of retirement planning. Therefore, you must aim to plan and prepare for all possible situations with adequate insurance or savings.
3. Unexpected expenses in retirement
While you may plan for the broad categories like home purchase, health expenses, a child’s wedding expenses, travel, etc., it is the unexpected expenses that can pose a risk in retirement. Unplanned expenses like home renovation, accidents, divorce or separation, widowhood, or an unexpected financial need of a child or grandchild, etc., can upset your retirement planning. Home renovation, repairs, robbery, theft, etc., can shock your ongoing system and force you to withdraw more funds than usual. If you get divorced or are legally separated, you may have to pay damages or alimony to your spouse. Most couples have common assets. Splitting these up can also drastically alter your financial standing. Financial discord can also be experienced in widowhood. If your spouse was earning and contributing to the household income, their absence could considerably change your standard of living. In addition to this, if your children require immediate funds for a financial emergency, you may have to use your retirement savings to rescue them. This can force you to change your future withdrawal strategies as well as your post retirement investment strategy. You may even be forced to take up a new job or invest more to cover up the dent in your savings. Therefore, it is always recommended to maintain an emergency fund in retirement. An emergency fund that can comfortably cover up to 6 to 12 months of your living expenses can be adequate to counter most financial emergencies. Moreover, such a fund ensures that you do not touch your retirement savings and preserve them for your future use. Additionally, it may also be advised to not use your retirement savings for your children’s needs. In most situations, the child can take a loan. Try to make a careful decision when it comes to helping out family members in need. It may be essential to keep in mind that replenishing your retirement savings is extremely hard. Contrarily, a younger person has several opportunities and health by their side to make money.
4. Mental health risks in retirement
Your retirement lifestyle differs in many ways from your work life. For someone who thrives on work and engagement, retirement may be dull and lonely. However, in times like this, it is essential to divert your attention to the benefits of retirement. Retirement does not always have to be dull. You can use it to learn new skills, work part-time, spend time with your loved ones, travel, and more. While you may go through tough times like losing a friend, the death of a spouse, etc., you may also have your children or grandchildren to focus on.
Retirement plans to consider to minimize risks and live happily
1. Estate planning
While planning for your absence may seem like a challenging task, the fact remains that retirement does put you one step closer to the time when you may not be around anymore. Therefore, the need for estate planning becomes vital now. Retirement is also a time when you may finally apply what you had planned for before. For instance, your children may want a stake in your assets while you are alive. They may also be concerned about paying taxes on your estate in your absence. To avoid this, you can start giving your assets slowly to your children as gifts. In 2022, you can give gifts worth $12.06 million to your heirs without paying any gift tax. For married couples, this is doubled to $24.12 million. These are lifetime limits, so you can distribute your gifts over time to accommodate multiple assets. Gifting can be a great strategy to remove the risk of your estate losing its value to taxes after transfer. This removes the chances of family feuds and keeps the value of your estate intact for future generations.
2. Part-time work
Working part-time can have several benefits. It can keep you busy, productive and help you socialize. Work can offer you purpose and objectives. It also allows you to slowly transition to retirement. From full-time, you can work part-time and finally quit working when you feel the need to stop. A part-time job can also help build your savings.
3. Maximizing Social Security benefits
Irrespective of how the markets work, you will receive your Social Security benefits. Therefore, it is in your best interest to focus on your benefits and adopt strategies to maximize them. For instance, delaying to claim your check till the age of 70 can enhance its value. In the case of a couple, it may help to claim one spouse’s benefits and delay the other one’s till 70. Remember that Social Security benefits may not be sufficient to support your retirement alone, but they can be used with other investments for a financially secure retirement.
To summarize
Life post-retirement can present many challenges. But there are also several ways to navigate your way around and avoid retirement risks and obstacles. All in all, being financially prepared for retirement requires planning. So, make sure that you create a robust retirement plan from the very start and stick to it. You can also contact a professional financial advisor to get expert advice on financial management in retirement, so you never run out of funds or face financial challenges in the golden years of your life.
To learn more about suitable financial strategies you can implement to avoid risk in your post-retirement financial planning, visit Dash Investments or email me directly at dash@dashinvestments.com.