Nearing Retirement? Kick Your Financial Fears To The Curb

July 19, 2021

As markets remain volatile, inflation creeps up, and taxes are poised to rise for wealthy taxpayers, a growing number of investors are expressing concerns about their prospects for life in retirement.

A recent study on the biggest risks to retirement security looked at the top concerns among investors who plan to retire in the next ten years. More than half (56%) of those surveyed say they are concerned about spending too much and running out of money in retirement, with 53% concerned about losing money in their retirement accounts, due to a severe drop in the stock market.

In a separate survey, nearly 60% of financial advisors note that clients need to accumulate more money in order to have a financially secure retirement, but many are too close to retirement to take on the risk of investing in high-risk/high-reward financial products.

Ironically, longevity, the desire to live a long and fulfilling life, is also one of the greatest risks to retirement security. Longevity risk refers to the possibility that retirees will live to such an advanced age that they will deplete their retirement savings and have to rely solely on Social Security to meet their essential expenses for housing, healthcare, food, clothing and transportation. While Social Security provides lifetime benefits, keep in mind that it’s only expected to replace about 40% of the average worker’s income in retirement. For most retirees, that would leave a significant gap between the income they receive and the income they need to accomplish all of their lifestyle goals.

While outliving savings in retirement is a very real risk for many Americans, there are a number of steps you can take now to help replace concerns about life in retirement with confidence. That begins with working with an independent advisor who can help you put a plan in place that brings all of the elements of wealth planning together in a seamless manner, including the four key areas discussed below.

1.    Risk management

Identifying potential risks that could prevent you from accomplishing your goals is important at every stage of life. That’s why you insure your home, automobiles, and business. It’s also why you protect your income—and the people who depend on your income if something happens to you—with disability and life insurance.

Risk management is also a critical part of your investment strategy. Are you taking on too much or too little investment risk, based on your financial objectives, timeframe and tolerance for market fluctuations? A strategy that is too risky can result in losses that are not easily recouped, especially for investors in or nearing retirement with shorter investment timeframes. It can also lead to poor decision making, like selling holdings as stock prices are falling, then buying back in as prices begin to rise again. A strategy that’s too conservative can also have serious consequences if investment earnings can’t keep pace with inflation over time.

This is why adhering to a disciplined investment process is so important. A consistent and repeatable process provides an orderly way to create and maintain a portfolio aligned with your specific goals and objectives while seeking to manage investment risk. If you don’t have a plan in place now, consider working with a fiduciary advisor to help you develop a strategy that will put you on the right course toward accomplishing your goals.

2.    Tax planning

Taxes in retirement are complicated. If not managed properly, they can take a serious bite out of your income in retirement. Tax planning should begin while you are still employed to help ensure that you are maximizing benefits such as employer retirement plans and that you receive the maximum tax benefits for various forms of compensation, including salaries, bonuses and stock options.

As you near retirement, it’s critical to have a plan in place for how you will take income in retirement. A tax-efficient withdrawal strategy determines which accounts to draw down on, and in what order, to optimize your income and tax exposure. Tax-smart strategies are also important for carrying out your legacy during your lifetime and transitioning assets to your heirs upon your death. Your financial advisor can partner with you and your CPA to help ensure you have a plan in place to manage taxes now and throughout  retirement.

3.    Debt management

Entering retirement with a considerable amount of debt—especially from personal loans or credit cards—can be challenging. As interest charges accrue, they can make balances grow larger and more difficult to pay down. For example, on a $1,000 balance paid over six months, you'll spend about $47 on interest if your card has an annual percentage rate (APR) of 16%. If you have the same balance but a 20% APR, you'll pay about $59 in interest over the same period, according to U.S. News. What may feel like small amounts now can eat into your income over time. That’s because debt effectively “subtracts” from the income you receive from Social Security and other sources in retirement. Even a mortgage, which is the most common type of debt among retirees, can reduce your financial flexibility in retirement.

Ideally, you want to pay off any revolving credit card debt and personal loans before you retire. Your financial advisor can work with you to put a plan in place to help rein in spending and manage debt as you prepare to enter retirement.

4.    Estate planning

Estate planning is central to the wealth management process. Without the right legal documents in place to protect your loved ones and your assets, in the event of your death a court could be left to decide the disposition of your assets or appoint a guardian for any minor children. However, estate planning is about far more than what happens after you’re gone. It’s about protecting your interests during your lifetime, including who will make important decisions on your behalf concerning your living arrangements, medical treatments, and end of life care if you’re unable to make these decisions yourself, due to temporary or permanent incapacitation.

A comprehensive estate plan generally includes a variety of documents including a last will and testament, living will, revocable living trust, durable power of attorney, and more. Life insurance, retirement plans, and business plans (if you own a business) may also be included.

It’s important to work with your financial, tax and legal advisors to put a plan in place as soon as possible to protect your life and your legacy. If you already have a plan, make sure you and your advisors are reviewing it regularly and whenever circumstances in your life change or state or federal tax laws change.

If you experience stress or anxiety about how financially prepared you may be for retirement, you’re far from alone. Retirement is a significant lifestyle change. However, confronting your fears and concerns is the first step toward building a confident path to the life you desire in the decades ahead. To learn more about ways to overcome apprehension and fear when it comes to your retirement, download 8 Blunders to Avoid in Retirement.