Your 5 Biggest Challenges During Retirement

Even though saving for retirement is important, your plan of action once you retire is at least as important. Regardless of how well you save during the accumulation phase, it’s crucial to plan how you will convert those assets into income.

Besides Social Security, many retirees have no guaranteed income other than retirement savings. A pension plan at work may not cover you, so chances are you’re going to have to rely on your efforts to overcome the following five challenges:

Challenge #1: Longevity

Men in their mid-50s today have about a one-in-three chance of reaching age 90, while women of the same age have roughly a 50% chance.

You will likely spend as much time in retirement as you did during your working years. In an environment with few guaranteed income sources, generating enough income to cover day-to-day expenses for 30 years or more can be especially challenging.

Challenge #2: Volatility

There is always the possibility of market swings and “Black Swan” events. 9/11, the real estate bubble that led to the Financial Crisis, and the Coronavirus pandemic are all examples of Black Swan events. Black Swan events are those that are impossible to predict.

The financial markets can be profoundly affected by them when they occur. In today’s world, trading often occurs electronically between numerous participants at lightning-fast speeds. Furthermore, trading doesn’t stop when the market closes, and social media has accelerated decision-making speed. As a result, our climate is conducive to greater volatility than we have ever seen before.

Challenge #3: Inflation

Annual inflation is the increase in the prices of goods and services. A whopping 13.9% inflation rate was recorded on January 1, 1981. Since hovering between 1% and 3% for most of the past several years, inflation has risen substantially in 2021. Your purchasing power will erode even if inflation rates remain relatively low. The inflation rate for this year is 8.52%, considerably higher than normal.  

As many retirees live on fixed incomes that can’t keep up with rising costs, higher inflation is particularly challenging. Many of the goods and services most commonly used by retirees are already experiencing greater-than-average price inflation.

The cost of health care, for example, can be particularly high. A 65-year-old couple in good health who retired in 2019 with Medicare Parts B and D and supplemental insurance could expect to pay $387,644 for healthcare costs for the rest of their lives, according to HealthView Services.

Challenge #4: Taxation

When you have a high tax bracket, you must pay special attention to how you invest your assets. For example, taxes are often overlooked when hedge funds and mutual fund managers seek profits. This profit is taxed as ordinary income; short-term capital gains can be abundant in portfolios with high turnover.

It is also possible for mutual funds to produce what is sometimes referred to as “phantom income.” Phantom income refers to dividends and/or capital gains reinvested in additional fund shares. Even though you never really see them, you are still taxed on them. Although their fund shares have declined in value, many investors pay taxes on capital gains distributions.

Challenge #5: Leaving a Legacy for Family and Friends

Leaving a legacy is still a primary concern for many Americans, even if they have enough income to comfortably meet retirement expenses. A federal estate tax alone can reduce the amount of your legacy in the future. Depending on where you live, erosion can be even more severe.

What to Do in Retirement

A common strategy in retirement was to reallocate your portfolio from predominantly equities to predominantly fixed income and live off the interest generated by these investments. As interest rates are near record lows and life expectancies are increasing, this strategy may no longer be viable.

Using the “4% rule of thumb,” you can avoid depleting your nest egg for approximately 25 years by withdrawing 4% of your retirement assets each year. However, this strategy is not foolproof, and if you live longer than 25 years after retiring, you may run out of money by the time you are 90.

The 4% rule may not be viable for every investor at a time when most people are dependent on Social Security. There are certainly some advantages to it. You can occasionally withdraw more than 4% if your investments are performing well. When the market declines, will you have the discipline to reduce withdrawals? How likely is it that you will avoid losses during your retirement years?

Identify Sources of Guaranteed Income

A variable annuity might make sense for at least part of your retirement nest egg. Variable annuities are offered by insurance companies and offer a variety of investment options. A variable annuity works like a 401(k) plan or IRA, where assets grow tax-deferred until withdrawn. Upon retirement, you can elect to receive life contingent income distributions, and you may be able to receive income that lasts as long as you live, depending on the rider you select.

Consider How You’ll Pay for Care

Even though no one wants to consider relying on others for care in the future, it’s important to plan. Many long-term care services- either provided at home, in a community facility, or in a nursing home- are not covered by major medical plans or Medicare and are often more expensive than an average person can afford from income alone. The cost of long-term care can be reduced by purchasing long-term care insurance. You can protect your assets from rising health care costs by paying an annual premium to an insurance company. Long-term care insurance or annuities with a long-term care rider can also help cover these costs.