The Riskiest Time in Retirement

Are you between the ages of 55 and 75? Congratulations, you’re in what’s called “the retirement red zone,” a 5-to-10-year window before and after retirement that’s both exciting and critical to plan for.

After years of hard work, you’re nearing the finish line—but this phase can also bring anxiety…one misstep could jeopardize your retirement plan. Here are 5 common risks that can arise in the retirement red zone, along with strategies to help avoid them and safeguard your golden years.

1. Miscalculating Your Retirement Needs

If you’ve managed to amass a significant nest egg, you have reason to be proud of yourself! But even if you have a million dollars saved, it may not be enough. If you plan to retire in your early or mid-60s, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as healthcare costs, home maintenance, and taxes. 

The best way to avoid financial anxiety in retirement is to map out various retirement scenarios to see what your savings can handle. We routinely review these scenarios for our clients. Knowledge will empower you, especially in this situation. Once you have an idea of what you’ll need for your unique situation, set up contingency funds to cover the unexpected and find ways to maximize your savings to give yourself a cushion.

2. Healthcare Inflation

If you’ve ever held a hefty medical bill in your hand, you aren’t alone. The United States has one of the highest costs of healthcare in the world. And as you age, you will likely require more healthcare services. 

According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will require $330,000 to cover healthcare costs in retirement. Most people don’t even have that much in their retirement accounts to live on, let alone to cover medical costs. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.

When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. For example, many people don’t realize basic Medicare has no cap on out-of-pocket expenses. A supplement is required to achieve a limit on costs. Comprehensive insurance is more expensive but can cap unexpected expenses. If you plan to retire before age 65, be sure to get a pre-Medicare policy in place.

3. An Inadequate Withdrawal Strategy

Just because you’ve worked hard to save for retirement and build up a nest egg doesn’t mean you can rest easy. Once you start tapping into your savings, you need to develop a strategy to withdraw your funds so they last the rest of your life, however long that may be. 

Since the historical average return of the stock market is roughly 10% per year, you might assume you can afford to withdraw that much from your portfolio each year. But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% - 5% or less. The market volatility of the last couple of years proves just how risky it is to bank on a 10% return every year. Since there is no simple, one-size-fits-all plan, your withdrawal strategy will need to be tailored to your unique needs, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.

Keep in mind, whatever withdrawal strategy you use, you will still need to consider the tax impact of your plan. Many people forget to plan for this crucial component and end up with less than they needed after taxes were paid. Make sure you are structuring your retirement plan in a tax-efficient way to avoid paying more than you have to during your golden years.

4. Market Downturns

With market volatility, many people in the retirement red zone are fearful about how much downside risk their plans can handle. Here’s where tried-and-true investing principles come into play.

Diversification is one of the most talked-about investment strategies for a reason: it helps to reduce the risks your investments experience from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings. 

It is important to evaluate your portfolio’s current allocation. You may need to rebalance or diversify your positions. Look at the big picture of all your accounts to ensure you are diversified across the board. It may also be helpful to consider a flexible withdrawal strategy which involves withdrawing less (and spending less) in the years where the market underperforms.

5. Unexpected Death of a Spouse

Losing your spouse is devastating, regardless of when it happens. But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income. 

It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure you are taken care of no matter what happens. 

Establish a Solid Safeguard

Retirement planning can feel overwhelming and risky due to the many unpredictable factors involved. The good news is that by understanding some of the common risks and challenges, you can better prepare for the unexpected and reduce the chances of your retirement plan falling short.

At The Rosamond Financial Group, we guide our clients through the critical retirement phase with confidence. I’ve assisted numerous retirees with tailored, tax-efficient strategies that help create a smooth transition. Would you like to learn more about how I can help you pursue your ideal retirement? Contact us today at 830-798-9400 or email solutions@rosamondfinancialgroup.com.  

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.