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Is Your Retirement Plan Safe From These 5 Threats?

Is Your Retirement Plan Safe From These 5 Threats?

| December 16, 2022

Retirement nest eggs aren’t always wiped out by unthinkable tragedies like natural disasters, major illnesses, or economic recessions. Sometimes the real dangers to your portfolio are much more subtle. So subtle, in fact, that many of the lesser-known risks are outright ignored because many people don’t realize what’s happening until it’s too late. Here are the top 5 threats to your retirement plan and what you can do to avoid them.

1. Inefficient Retirement Distributions

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. 

Unfortunately, many people mistakenly assume that how and when they withdraw from their retirement accounts doesn’t matter as long as they have a sizable amount saved. They also falsely believe that they will always be in a lower tax bracket in retirement. This can result in inefficient withdrawals that increase your tax liability unnecessarily and greatly reduce the longevity of your portfolio. Timing makes all the difference—and it’s a key component in safeguarding your retirement nest egg. 

It’s also important to pay attention to how much you’re withdrawing. Since the S&P 500 has historically earned an 11% annual average return, you might assume that you can afford to withdraw 11% of your initial portfolio value (plus a little more for inflation each year). But in reality, to shield your savings against the uncertainty of the market, you may have to limit your withdrawals to 4% or less. Since there is no simple, one-size-fits-all plan, you need to figure out what will work for you and your unique situation, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.

2. Taxes

Just like during your working years, taxes play a large part in how long your retirement income will last, and not understanding the tax consequences of your retirement vehicles can be a major threat to your retirement plan.

Each type of retirement account is taxed differently. If you don’t have a strategic withdrawal plan in place, you could end up with a large tax bill at the end of the year. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability. 

Working with a financial planner or tax advisor is a great way to create a tax-efficient distribution strategy for retirement. They can look at your tax bracket, retirement accounts, and Social Security to help you withdraw money in the most tax-efficient way. 

3. Market Volatility

With talks of a looming recession, many people nearing retirement 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. 

Similarly, it’s crucial to make sure your investments align with your risk tolerance and capacity. The closer you are to retirement, the less volatile your portfolio should be. If you need your money in the next 5 years or less, stay away from volatile vehicles. The potential for growth is not worth the risk of losing all or a part of your nest egg.

Work with a professional 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.

4. Healthcare Costs

According to Fidelity, the average couple turning 65 in 2022 will need $315,000 saved (after tax) to cover healthcare costs in retirement. Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. What’s more, healthcare costs usually rise faster than inflation, making this threat to your retirement plan that much worse. 

Without your employer’s health insurance, adequate coverage is typically more expensive and harder to find. 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. 

5. Failing to Plan Ahead

We all know that unexpected life events can occur at any time and derail your plans. The same can happen to your retirement. There is a considerable gap between when a person expects to retire and when they actually retire. While the average expected retirement age is 66, most people actually retire at 61. This may not seem like that much of a time difference, but it can have a huge impact on your long-term retirement plan.

There’s always the chance you could lose your job or fall ill. Even if you want to work longer and save more, there’s no guarantee you’ll be able to do that. Early retirement can destroy even well-laid retirement plans. The loss of income during the final years of your career can spell financial disaster, and this is especially true for high-earners. 

To protect against this threat, plan for the unexpected. Make sure you have adequate disability insurance to shield your income in the event of an illness or disability. You can also work with an advisor to create scenarios and see what your savings and income would look like if you were forced to retire early.

Is Your Retirement Plan Safe From These Threats?

Is your retirement plan suffering from some of these lesser-known threats? If so, it’s not too late to course-correct and improve the longevity of your savings. At FSI Wealth Management, we are dedicated to helping clients prepare for retirement and plan for the unexpected. Don’t wait to start planning, schedule a no-obligation introductory meeting by calling me at (619) 681-1911, emailing, or scheduling a time online.

About Paul

Paul Neves is president and wealth manager at FSI Wealth Management, a leading independent wealth management firm based in San Diego, California. Paul is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Financial Consultant®. Working with clients in the financial industry since 1989, Paul has dedicated his life to seeing his clients and their families reach their goals and fulfill the financial plans they have created for their life. He believes that trust and respect are key to building strong, long-lasting relationships with his clients. Paul is known for helping families take the mystery out of preparing for today and tomorrow. 

Paul graduated from San Diego State University in 1989 with a bachelor’s degree in business administration, concentrating in financial planning and services. He is currently a resident of Point Loma, California, where he spends his free time with his family and friends either boating, cooking, wine tasting, or traveling. To learn more about Paul, connect with him on LinkedIn.