When Planning for Retirement, Expect the Unexpected. Sponsored By: Todd Carmack

It has often been said that “the only constant is change” – and this is true in many areas of life, including when you are planning for retirement. After you retire, you may not have to set your alarm clock every night. But you can still be exposed to a variety of potential risks to your savings and future income. Therefore, you have to be prepared. Otherwise, you could have an unwanted wake-up call!

Unexpected financial incidents in retirement can be particularly detrimental, because if you lose some (or all) of your income generation sources, or if your portfolio is decimated by a correction in the stock market, it can have a substantial impact on how – and how well – you are able to live the remainder of your life. 

With that in mind, it is essential that you determine where the various risks may be lurking and how you can protect yourself, your portfolio, and your financial future if one (or more) of them appears. 

How to Prepare for the Unexpected in Retirement

While nobody has a crystal ball to see into the future, there are some common risks that could have an impact on your retirement. So, it is important to be prepared for them…just in case. Just some of these risks can include:

• Volatility in the stock market
• Low interest rates
• Inflation
• Emergencies
• Healthcare needs
• Long-term care 
• Increased taxes
• Longevity

Volatility in the Stock Market

Although the stock market offers the opportunity to generate a substantial gain, it can also pose the risk of loss – and the closer you are to retirement, the more a loss in the stock market can impact your future lifestyle. Further, the more you lose in an investment, the more future return it will require just to get back to even.

Gain Required to Get Back to Even Following a Loss

One way to reduce your risk in an unexpected market drop is to allocate more of your overall assets to non-equity financial vehicles. While fixed and fixed indexed financial tools might not offer the allure of exponential gains like equities do, they can also allow you to sleep much better at night, knowing that you’ll have no future losses to make up for. 

Low Interest Rates

Ever since the economic recession in 2008, the United States has languished in a historically-low interest rate environment – which has made it difficult for those who are trying to keep their money safe while at the same time allowing it to grow.

As an example, a fixed investment with a 2% return would only generate $20,000 per year in income on an investment of $1 million. Is that enough for you to live comfortably for the rest of your life in retirement?

That’s why over the past decade or so, many individuals and couples have turned to financial vehicles like fixed indexed annuities. These annuities offer the opportunity to earn a higher return that fixed products, while keeping principal safe in any type of market or economic environment. They will also generate an ongoing, reliable income stream for the remainder of your life.

Inflation

Inflation is a risk that can be somewhat sneaky. For example, with some items and services, an increase in price can be gradual over time. Therefore, it is barely noticeable. But it is still necessary to keep your income on pace with rising prices. Otherwise, you may find that you’ll have to cut back on your purchases. 

Average Prices in 2000 versus 2020

Sources: https://thepeoplehistory.com/2000.html / https://thepeoplehistory.com/pricebasket.html / 

Using an average inflation rate of just 3.2%, your income would have to double in 20 years in order to just maintain the same lifestyle that you have today. For instance, if you are currently generating $4,000 per month in income right now, that amount would have to increase to $8,000 per month in 20 years in order to keep up with the very same lifestyle you have today. So, in order to prepare for inflation risk, you’ll need to incorporate a way to increase your retirement income on a regular basis in the future.  

Emergencies

At any point in life, whether you’re in retirement or you are still entrenched in the working world, you are at risk of costly emergencies. These could include an uninsured car repair, a leaky roof, or an unexpected trip to help a family member in need. 

Because you won’t likely want to dip into your retirement savings or put these costs on a high-interest credit card, having an emergency fund in place is a recommended solution. Ideally, you should have approximately six months of living expenses in your emergency fund – but any amount is better than being completely unprepared. This money should be kept in a safe, highly liquid, and easily accessible place, such as a savings or money market account at a bank or credit union.

Healthcare Needs

As we age, the need for more healthcare services tends to rise. According to a recent study by Fidelity Investments, a 65-year-old couple who retired in 2020 can expect to spend approximately $295,000 in out-of-pocket healthcare costs – not including long-term care services. 

One way to help combat these expenses is to ensure that you have a good health insurance and/or Medicare plan that provides you with adequate financial protection. It is also recommended that you have a good understanding of where your costs will come from, such as any deductibles, coinsurance, and/or copayment responsibilities. 

Long-Term Care

Another “unexpected” expense in retirement could be the need for long-term care services. While nobody likes to think about it, the reality is that many of us will require assistance – whether it is full-time, around-the-clock care or help with basic daily living activities like bathing and dressing.

According to U.S. government statistics, when someone reaches age 65, they have a 70% chance of requiring long-term care services at some point in their remaining life – and this care can be expensive. 

Based on the Genworth 2020 Cost of Care Survey, the price for just one month in a private room in a skilled nursing home facility was more than $8,800 in 2020. This equates to over $100,000 per year. A semi-private room is less – but at $7,756 per month (on average), it is still extremely costly. 

How long would your savings last if you had a need for long-term care services? Worse yet, what if both you and your spouse required care?

In any case, long-term care services are expensive. So, it is important that you have a plan in place to cover some or all of these potential costs. This could include having a stand-alone long-term care insurance policy, a life insurance policy or annuity with a long-term care rider, and/or other type of payment alternative. 

Increased Taxes

For most people, taxes are a part of everyday life – and this won’t change when you retire. But, while paying taxes isn’t necessarily a big surprise to most people, the amount of tax that is due might be. For example, the top federal income tax rate in the United States over the past 108 years has been as low as just 7%, and as high as 94%. 

Top Federal Income Tax Rates 1913 – 2021

Source: Inside Gov (http://federal-tax-rates.insidegov.com/)

While there will likely always be taxes to pay, there are some strategies that you could use to reduce – or even to eliminate – your share. One option is to take advantage of Roth IRAs and retirement plans. 

With these accounts, the contributions that you make have already been subject to income tax. So, unlike with traditional IRAs and retirement plans, you are not able to make pre-tax deposits. However, the growth in a Roth account takes place tax-free, as do the withdrawals. Therefore, no matter how high the income tax rates are in the future, a Roth account will allow you to access – and spend – 100% of your withdrawals. 

Longevity

Yet another “unexpected” risk is longevity. Although nobody knows exactly how long they will live, the overall average life expectancy in the United States has risen significantly over time. Because of this, it is not uncommon for retirement to last for 20 or more years.

Although that may be positive in many ways, it will require your savings and your retirement income to last for a much longer period of time. Given that, you must take advantage of financial vehicles like annuities that can guarantee an income stream for the remainder of your lifetime – regardless of how long that may be. 

Otherwise, without at least one or more guaranteed streams of income to rely on, you could run the very real risk of depleting your assets, as well as your incoming cash flow, while it is still needed. 

Are You Ready for the Unexpected in Retirement?

There can be a long list of unexpected financial pitfalls in retirement – and without proper preparation, even a seemingly “small” emergency could have a significant impact on your finances, and your lifestyle, going forward.

That being said, are you ready for the unexpected in retirement?

If not – or if you have a plan in place but would like to get a second opinion – feel free to contact us and set up a time to chat with a retirement income specialist.