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The Top 5 Financial Planning Challenges In The First 10 Years Of Retirement

The Top 5 Financial Planning Challenges In The First 10 Years Of Retirement

January 06, 2021
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It’s the moment you’ve been waiting for. It’s time to pack up your office and transition into the next phase of life: retirement! New adventures await you during these golden years, but one thing that shouldn’t change is financial planning. If you thought your years of saving, investing, calculating, and planning are over now that you’ve reached your goal, think again. You still have decisions to make, actions to take, and plans to strategize so that you can enjoy a fulfilling retirement.

We’ve found that most retirees face the same 5 financial planning challenges during the first 10 years of retirement. Let’s discuss these challenges so you’re not caught off guard.

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 Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free.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 having 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. 

5. Planning On Your Own

Now that you’ve reached retirement, it can be tempting to hit cruise control—but don’t give in to that temptation! After strategizing to grow your wealth throughout your career up until now, don’t try to manage your money on your own during retirement. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up and having one you can’t outlive. 

You didn’t get to this milestone without decades of hard work and overcoming challenges, so don’t let these 5 challenges (or any others) trip you up now. We at 1on1 Financial would love to help guide you on your journey to a comfortable retirement. Call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call to get started!

About 1on1 Financial

1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.

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(1) https://ycharts.com/indicators/us_health_care_inflation_rate

(2) https://www.usinflationcalculator.com/inflation/current-inflation-rates/

(3) https://www.thebalance.com/how-much-emergency-savings-do-retirees-need-4582473