Are You in the Retirement Red Zone?
By Net Worth Advisory Group
If you’re a football fan, you know that the “red zone” is the crucial area within 20 yards of scoring a touchdown. In retirement terms, the red zone represents the 5-to-10-year span before and after you decide to retire; and it’s a time when careful strategic planning is essential in order to avoid risks and meet your financial goals on time. To help you prepare, let’s explore 5 potential risks that commonly occur in the retirement red zone, so you can be aware and make a smoother transition into 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 may 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 $315,000 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 that 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 that 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 that 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 talks of a looming recession, many people in the retirement red zone are fearful about how much downside risk their plans can handle. This is a valid concern given the market volatility of the last couple years. 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 that you are taken care of no matter what happens.
Partner With a Trusted Professional
You’re preparing for a new and unfamiliar time of life, so entering the retirement red zone may bring many questions. The process is often marked by stress and complexity, but by understanding these potential risks and common challenges you can proactively plan for the unexpected, reducing the likelihood that your retirement plan will experience setbacks.
At Net Worth Advisory Group, we support our clients by guiding them through this phase of life with confidence and clarity. By leveraging our knowledge and experience, we assist many retirees in making a seamless transition through our personalized and tax-efficient retirement planning. Feel free to reach out to us by calling 801-566-6639 or schedule a complimentary, no-obligation consultation to see if we are a good fit to help you pursue your goals.
To learn more, visit our website.
About Net Worth Advisory Group
Founded in 2003, Net Worth Advisory Group is an independent, fee-only, CERTIFIED FINANCIAL PLANNER™ and investment advisory firm located in Salt Lake City, Utah. We specialize in helping people transition from the workplace into retirement and ensuring that those who are already retired will not outlive their nest egg. Our top priority is to have clients experience a greater sense of ease with diligent, personalized wealth care and the implementation of customized financial plans and ongoing personalized asset management. We equip all clients with a comprehensive financial plan, meeting every six months to update as needed and review investment performance. Our team is passionate about providing comprehensive financial planning with the fee-only model, and we love feeling like we’re making a difference in our clients’ financial lives.
As a NAPFA-registered fee-only advisory firm, our recommendations are untainted by a hidden agenda to sell financial products paying large commissions. Unlike our competitors at brokerage firms, insurance companies, and banks, we are compensated solely by our clients, so we are financially motivated to provide objective advice that is always in our clients’ best interests. Anyone can call himself or herself a financial planner, but only an advisor with the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation has met the education, examination, experience, and ethical requirements mandated by the CFP® board. According to the CFP Board, there are 97,000+ CFP® professionals in 2023, representing about 1 in 3 financial advisors in the U.S. Net Worth advisors are also members of NAPFA, which only has about 4,600 advisors, and are either CFP® professionals or CFP® professionals in training.
Net Worth Advisory Group’s mission is to significantly improve the lives of our clients by delivering exemplary financial planning and wealth management advice that enables them to live the lives they have imagined.
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