Retirement Planning Blind Spots
Updated on Mar 26 2019
When it comes to retirement planning, there is a lot to consider. From how much to save to tax considerations to minimum withdrawal requirements and ideal retirement age. The decisions can feel endless. Even if you have been saving for decades and think you are ready to retire, these common pitfalls can lead many financial plans astray. The good news is that these mistakes can be easily avoided with the right research, strategy and financial education.
Consider these five common retirement planning blind spots for a financial success in retirement.
1. Not preparing for market risk
It makes sense that most people retire when their portfolios are large and the market is looking up. However, when portfolio balances are enlarged, it often means the market is heightened - and people are more at risk. Even though more people choose to retire after periods of strong market returns, it can reduce the sustainability of their portfolio over time and lead to false sense of security.
To avoid this pitfall, retirees and pre-retirees should consider setting aside a portion of their retirement portfolio for safe securities that they can draw from if the bond-market weakens. Another strategy to protect against market risk is to decrease portfolio spending when the market is volatile or weak.
2. Failing to account for inflation
With inflation levels coming in at less than 2 percent for over ten years, it’s easy to dismiss inflation in retirement planning. However, inflation is important to consider as retirement nears. Higher prices on goods and services will reduce buying power and lessen returns on investments. Additionally, inflation on healthcare related expenses run higher than the general inflation rate and can negatively affect retirement savings.
To protect retirement planning from inflation consider embedding direct inflation hedges bonds in your portfolio. When inflation increases this will allow your principal or interest from the bond to also increase. Additionally, try and have a healthy share of stocks in your portfolio to try and ‘out-earn’ inflation over time.
3. Neglecting to consider long-term care and other unforeseen medical expenses
It is estimated that the average 65 year-old-couple will spend $280,000 on healthcare expenses throughout their retirement, not including long-term care expenses. While Medicare can help cover some of these expenses, it does not cover all expenses and retirees are often still responsible for covering any supplemental insurance policy premiums, prescription drug costs, and some forms of long-term care.
To try and cover these unexpected medical expenses, be sure you are budgeting for known healthcare expenses like supplemental insurance and prescription drugs. It may also be wise to carefully consider a long-term care insurance policy and conduct a cost-benefit analysis to see if that is a good fit for your family.
4. Forgetting about taxes on investments
It’s important to remember that as large as your portfolio make look, it’s not all yours! Remember that if you have tax-deferred accounts, you will owe income tax on much of your withdrawals, and you may even owe state income tax on those as well. And, it’s not just taxes on your withdrawals you will have to face in retirement. Retirees must also consider taxes on Social Security.
While there is no real way to protect your portfolio from taxes, you can explore tax relief options your municipality may offer to seniors and retirees or people on a fixed income. If not, or you do not know where you will be living in retirement, be sure you are budgeting for taxes when planning for your financial future.
5. Neglecting to hire an expert
If you have fallen prey to these common pitfalls or are concerned about other retirement blind spots, hire an expert. A fiduciary financial advisor can help you work through a comprehensive financial plan, highlighting any areas of concern and helping you protect against them as retirement draws closer.
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