As with any endeavor into uncharted territory, entering into retirement can be a nerve-racking experience. I like to remind clients that worrying about retirement is completely natural—they are not alone. And a good financial planner will help clients understand the risks involved in their retirement years and build a plan to help them approach those years with confidence.
Here are six of the most common risks that a retiree may face:
HEALTHCARE RISKS
With fewer employer-sponsored retiree benefits and limitations to Medicare, how will I handle rising medical and prescription drug costs?
INFLATION AND TAXES
How will inflation impact my purchasing power and my ability to generate income for the lifestyle I’d like to lead during retirement?
LONGEVITY RISK
How long will my retirement savings last? How can I make sure I don’t run out of money?
LEGACY RISK
How do I leave a legacy while making sure I provide for my own needs during retirement?
LONG-TERM CARE RISK
How will my retirement plan be affected by an unexpected event or long-term illness not covered by medical insurance or Medicare?
MARKET RISK
How will the volatility of equity markets factor into my overall retirement plan? Can I afford to take income from my portfolio if the markets have a few bad years?
Clearly, there is a lot to think about when planning for a 30-plus-year retirement.
As in other areas of financial planning, the most important factor to a successful retirement plan is awareness. Knowing what your risks are and coming up with a strategic plan to mitigate those risks will put you in the best position for success. Here are some steps you can take, to make sure you’re prepared:
ASSESS YOUR CURRENT FINANCIAL SITUATION
The first step to coming up with a successful long-term retirement plan is to understand where you are today. Take a look at your current balance sheet and keep your various qualified and non-qualified accounts organized. Stay up-to-date with your insurance policies, making sure you know how much you are covered for, and when your policies expire.
UNDERSTAND MONTHLY CASH FLOW
Keep a detailed log of how much income you receive and how much you’re spending. Your cash flow will determine how long your retirement savings will last, and whether you need to increase your savings to achieve your retirement goals. During retirement, consider utilizing pension or annuity income payments to create an “income floor,” a fixed amount of guaranteed lifetime income payments you can rely on.
FACTOR IN TAXES
How you utilize various tax-advantaged savings vehicles can make a big difference to the effectiveness of your retirement plan. Make sure to take advantage of tax deductions and tax-deferred savings opportunities during your accumulation years. Then consult with your CPA and financial planner as you approach your retirement years, so you know which accounts make the most sense to draw income from first, depending on how they’re taxed.
Understanding the primary risks we all face in retirement, and coming up with a solid plan to address these risks, will put you well on your way to achieving the retirement you’ve always dreamed of.
Kevin R. Luchetta offers advisory services as a representative of Northwestern Mutual Wealth Management Company (WMC), a limited purpose federal savings bank, and a wholly owned subsidiary of The Northwestern Mutual Life Insurance Company, Milwaukee, Wis., (NM). Northwestern Mutual is the fleet name for NM, its subsidiaries and affiliates. Investments held with or managed by WMC are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by WMC or its affiliates and are subject to investment risks, including loss of the principal. Kevin R. Luchetta is an insurance agent of NM (life insurance, annuities and disability income insurance), and Northwestern Long Term Care Insurance Company, a subsidiary of NM, and a registered representative of Northwestern Mutual Investment Services, LLC (NMIS), an NM subsidiary, broker-dealer, investment advisor, member FINRA, SIPC. Pioneer Financial is a marketing name used by a group of Northwestern Mutual representatives (not all of whom are affiliated with WMC) including Luchetta (referred to as the “firm”), and is not a legal entity, partnership, investment advisor, broker-dealer or affiliate of NM. The information contained in this article is not a solicitation to purchase or sell investments or securities. The views expressed herein are those of the author and may not necessarily reflect the views of Northwestern Mutual. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements.
This article was originally published in the February/March 2016 issue of Worth.
