Retirement is supposed to be about enjoying the good things in life. It’s a time to travel, pursue a favorite hobby, and spend time with family. After all, you’ve worked hard for decades to accumulate assets. Retirement is your time to enjoy the fruits of your labor.
Of course, saving money and getting to retirement is only half the battle. After you leave the working world, you will still face risks that could threaten your financial stability. Without a plan to manage those risks, your retirement may not be as comfortable as you would like.
Many retirees associate the word risk with market volatility. It’s true that market performance could threaten your assets in retirement. However, risk isn’t all about investments. There are a broad range of risks that could impact your financial stability.
Below are three such risks to consider as you enter retirement. If you don’t have a strategy to manage these risks, now may be the time to develop one.
They say death and taxes are the only certainties in life. Taxes don’t go away just because you stop earning income. Many retirees incorrectly assume that taxes won’t be an issue for them once they stop bringing home a paycheck. The truth is that much of your income in retirement could be taxable.
If you have assets in 401(k) plans, traditional IRAs, SEP IRAs, and other qualified retirement accounts, you will likely pay income taxes on distributions. The Roth IRA is the exception to this rule, as distributions from Roths are tax-free if you are over age 59 ½ and the account has been open for at least 5 years.
You may be surprised to learn that you could also pay taxes on Social Security. Depending on your income, you could pay taxes on up to 85 percent of your benefits. Your taxable percentage depends on your “combined income,” which the Social Security Administration defines as your adjusted gross income, nontaxable interest, and half your annual Social Security benefit. The higher your combined income, the more of your benefit that will be taxable.1
If you haven’t planned for taxes in your retirement budget, you may want to revisit your strategy and adjust. Taxes are usually a significant expense for many retirees.
Inflation is easy to overlook, but it’s too important to ignore. Inflation is the gradual increase in the prices of goods and services from year to year. It’s driven by many factors, including costs of materials and labor, interest rates, and economic conditions.
There are very few costs that aren’t impacted by inflation. Everything from groceries to clothing to utilities to health care are usually affected by inflation over time. Some cost areas, like health care, may see higher inflation rates than other expenses.
While inflation is usually modest on an annual basis, it can have a significant impact over time. Consider that just a 3 percent average annual inflation rate would lead to a doubling in prices over a 24-year period. If you retire in your mid-60s, it’s very possible that you could be retired for 20 years or more. Could your budget withstand a doubling in prices?
Develop a retirement strategy that allows your income to increase through retirement. For instance, resist the urge to become so conservative with your investments that you eliminate all growth potential. You will likely need some growth to increase your income.
Also, consider delaying Social Security to increase your benefit. While you can first file at age 62, you may want to wait until your full retirement age or beyond to start receiving payments. The longer you wait, the higher your benefit will be.
Health Care Costs
Think Medicare will cover all your health care expenses in retirement? Think again. According to Fidelity, the average 65-year-old couple can expect to pay $260,000 out-of-pocket in retirement on things like deductibles, premiums, copays, and more.2 Medicare is a helpful resource, but it usually only covers a portion of your medical bills. There are some services that Medicare doesn’t cover at all.
That Fidelity estimate doesn’t even include the costs for long-term care, which is extended assistance for daily living activities like eating, dressing, and mobility. The U.S. Department of Health and Human Services estimates that 70 percent of retirees will need long-term care at some point.3 The cost for care, whether provided in your home or a facility, can often be thousands of dollars per month.
Again, make sure health care spending is a part of your retirement strategy. Consider maximizing contributions to a health savings account (HSA) so you can take advantage of tax-favored dollars to pay medical bills. Also, think about long-term care insurance as a protection against assistance costs.
Ready to develop a plan for these risks and more? Contact us today at Carstens Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
The material is not intended to be legal or tax advice. The insurance agent can provide information, but not advice related to social security benefits. Clients should seek guidance from the Social Security Administration regarding their particular situation. The insurance agent may be able to identify potential retirement income gaps and may introduce insurance products, such as an annuity, as a potential solution. Social Security benefit payout rates can and will change at the sole discretion of the Social Security Administration. For more information, please consult a local Social Security Administration office, or visit www.ssa.gov
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