When you are planning for retirement, you often think “do I have enough money?” Many times, you will consider a safe withdrawal rate, look at your savings, Social Security, pensions and other assets to make that assessment. While the answer might be yes today, there are a number of things to consider to make sure your plan stays on track. This article will discuss some of the more common derailers that you need to keep in mind.

1.) Sequence of Returns Risk

Two people can retire a year or two apart with the same amount of savings, spend the same amount each year and have their money invested identically, and one could run out of money long before the other. This is the sequence of returns risk, where early losses while you are withdrawing money can deplete your retirement savings at an alarming rate. Imagine Joe has $1M saved for retirement. He retires and the market goes down 30% and he withdraws $60,000. A few months later the market fully recovers, but for a time his account went from $1M to $640,000. Conversely, Jane’s account temporarily went down from $1M to $700,000 and went right back up, while Joe’s account is now at $914,000. Planning for potential market drops by creating a volatility buffer can change the course of your retirement. I’ve run the numbers and the difference can be significant. Reach out if you would like to know more.

2.) Underestimating Healthcare Costs

Retiring before age 65 means you don’t yet qualify for Medicare. Planning for the cost of medical insurance and factoring into your budget is crucial. If your company provides medical coverage, you may be saving as much as $1,000 or more per month compared to buying your own insurance. It is important to understand the cost of insurance and understand your options.

3.) Taking Social Security Too Early

The right time to take Social Security can be different for each person. It’s important to have a conversation with your financial advisor prior to making the decision. Drawing benefits at age 62 can permanently reduce your monthly income by up to 30% because taking it early means you get a smaller monthly payout. You need to coordinate your claiming strategy with your tax planning and investment withdrawal strategy as opposed to making a decision simply to have cash flow immediately.

4.) Underestimating Lifestyle Creep

What is your plan when you retire? Will you sit at home and garden? Do you want to travel the world? Are you planning to buy a new car or boat, or renovate your home? Perhaps you have grandchildren and you will be spending time traveling to see them or taking them on trips to see the Magic Mouse? These things cost money, and while many people assume that retirement means your spending will go down, that isn’t always the case. With free time, you may want to take up new hobbies, travel, or even pay off your home in one lump sum. You want to plan accordingly and understand what your lifestyle will truly cost. Your spending may not be linear. Have you also considered the cost of care in the future? Long-term care for the later years is best to plan in your 50s and 60s, so the cost isn’t a huge surprise when you need it.

5.) Poor Tax Planning on Retirement Withdrawals
When it comes to taxes, do you project your income and your taxes out multiple years or just see where you are in April each year? If you aren’t strategic in your planning, you could be triggering capital gains in years when you wouldn’t want them, you might miss opportunities to do Roth conversions in lower tax years, and you may let your taxable retirement accounts grow significantly prior to age 73, the current RMD age. This is when you are required to take money out of your retirement account. If you let the accounts grow significantly, you may be setting yourself up for taxation in higher tax brackets as well as increased Medicare premium surcharges.

Conclusion
There are strategies in all of these areas where a good financial advisor can help you make sure you don’t run out of money and help you keep more of it instead of giving more to your uncle in Washington D.C.

___

Disclaimer: This article is for informational purposes only and is not tax, legal or financial advice. Everyone’s situation is different, so consult a financial advisor. If you would like to connect with me, please call 615-619-6919 or email smoran@redbarnfinancial.com. You can learn more at redbarnfinancial.com. All examples are hypothetical and not representative of any specific strategy or situation.