You only retire once, so it’s critical to get the details right. However, it can be difficult to fully comprehend the experience of retirement before you actually live it out. For many retirees, this leads to miscalculations in planning and mitigating the threats to a successful retirement. Let’s take a look at some of the major retirement miscalculations and threats.
The first is not understanding the impact of taxes in retirement.
Income sources typically change from an employer paycheck to some combination of pension, Social Security, and retirement savings. The tax treatment of each source may vary, and the discretion of choosing how much of your savings to spend and when can cause further complications. Each part of your retirement income impacts how others are taxed and the total amount you end up paying.
For example, a portion of your Social Security may be counted as taxable depending on the total of certain categories of your income — called your “provisional income”. Taking withdrawals from retirement savings can cause a higher provisional income, which results in more Social Security being taxable, which may force additional savings withdrawals to meet your spending needs, which in turn results in further taxation.
The second threat or miscalculation is not knowing what you own in your portfolio and why you own it.
All the rules change when you retire. Everything shifts from accumulating savings for a future retirement goal to withdrawing savings for your retirement income needs. In other words, it’s time to start spending instead of saving. As a result, the focus of your portfolio must shift as well.
The problem is that most investors don’t really understand what they have in their portfolio to begin with. The financial industry tends to push cookie cutter solutions designed to meet the needs of the masses rather than address your unique situation. The result is a homogenized portfolio with little flexibility or transparency and little connection to how it serves your retirement needs.
A further issue is that many become singularly focused on certain aspects of their investments, such as dividend yields, rather than looking at the big picture. This can lead to portfolios with undiluted risks. It is vital that your income sources and assets work together to achieve your retirement goals. Understanding what those assets are and why you own them is the first step.
The third threat or miscalculation is underestimating the impact of healthcare costs.
A compelling issue affecting retirement is that the population of people age 65 and older is growing faster than all other age groups. In the U.S., 10,000 Baby Boomers reach retirement age every day and will continue to do so until 2030. Not only are more people reaching advanced age, but they are also living longer as well. There are many positive aspects to this, but one consequence is a higher occurrence of healthcare needs, including long-term care.
According to the U.S. Department of Health and Human Services, nearly 7 out of 10 people will require some form of long-term care services during their lifetime. The current national median cost of care can be as high as $9,034 per month, or $108,408 per year per person. It is easy to see how this can devastate a retirement portfolio in a short period of time. Source: https://www.genworth.com/aging-and-you/finances/cost-of-care.html
Human nature tends to downplay the idea we will ever experience this ourselves, but the statistics make it clear each of us needs to contend with the possibility. There are numerous ways to prepare for the cost of extended healthcare, sometimes by simply optimizing assets you already have.
The fourth threat or miscalculation is not being prepared for disenchantment in retirement.
So much time is spent looking forward to retirement that we tend to envision things going a certain way. Many of us picture living the “golden years”, but the reality is more sophisticated than that. Gerontology research has identified six stages of retirement: Pre-retirement, Retirement, aka “the honeymoon”, Disenchantment, Reorientation, Routine, and Termination of Retirement. It’s not a simple as punching the timeclock one last time and then going on permanent vacation.
It is important to recognize that one significant part of retirement is a time of disenchantment and reorientation as you adjust to life after work and career. Recognize this as normal and communicate your experience to your loved ones. Successful retirements are those that are meaningful and filled with what matters most to us. This can include leisure, volunteering, mentorship, or even more work. The key is to identify your sense of purpose.
As cliched as it may sound, retirement is not merely a destination, it is part of the journey. Your Nepsis® advisor can serve as your guide. Retiring With Clarity®.
Advisory Services offered through Nepsis, Inc.; An SEC Registered Investment Advisor.
