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5 Retirement Risks You Need to Plan For

The best retirement plans let you hope for the best and prepare for the worst. From stock market free-falls to soaring inflation, there are five major retirement risks that your retirement plan must be ready to handle. In this article, we explore each risk, as well as strategies you can use to keep your nest egg safe.

1. Investment

Investor, beware! As you approach retirement, your ability to weather stock market lows will sharply decrease. In fact, how the market performs in the last three years of your career and the first five of your retirement has an outsized impact on your savings. Not only do you have less time to recover from market downturns, but as you take withdrawals for income, less money remains invested in the account to help you recover. If several years of negative returns occur during this crucial early retirement period, your savings could run out far sooner than planned. This is called sequence of returns risk.

The best defense against sequence of returns risk is to house at least part of your savings in an account that is not vulnerable to stock market losses. Doing so allows you to strategize your withdrawals so that in years with negative returns, you only withdraw income from your safe account. In volatile markets, multiple accounts can be a lifesaver. Ideally, your safe account should also maximize earnings—a tall order for traditional risk-free options such as savings accounts and CDs. Fixed index annuities are a popular, zero-risk alternative with a higher earnings potential than your garden-variety savings account, although they aren’t for everyone. A financial advisor can help you determine if an annuity is in your best interest.

2. Inflation

The second law of thermodynamics tells us that the universe tends toward increased disorder. Similarly, the second law of inflation tells us that the universe tends toward increased prices—and also that in my day, a gallon of gas was only 25 cents. The average annual rate of inflation is about 3%. As a result, just to maintain the same lifestyle, your income will need to increase by at least 3% each year. When you live on a fixed retirement income, you can no longer depend on raises and promotions to keep your income stable. Without proper planning, inflation can easily eat away at your retirement savings, also known as inflation risk.

The first step to combating inflation risk is to calculate how inflation will impact your income needs over the course of your retirement. This calculator will help you determine how much income you will need five, ten, or even fifteen years from now. The next step is to find financial instruments that will either help you generate extra income or lower your expected costs. Stocks are a popular income-generator, while different Medicare and HSA plans can help you minimize your healthcare costs, which is the largest expense in retirement. Check out our full guide to inflation-proofing your retirement.

3. Long-term care

Second only to healthcare costs, long-term care is one of the greatest expenses most retirees encounter. We say “most” because about 70% of Americans require some form of long-term care, according to the Department of Health and Human Services. Depending on the level of required care, the monthly cost of long-term care services in the state of Connecticut ranges from $4,000-$14,000. The cost of long-term care is prohibitive for most retirees and can devour savings unless a contingency plan is put in place.

What is that contingency plan? For many, there are only two options for funding long-term care: paying out of pocket or long-term care insurance. If adding $48,000 or more to your annual expenses is a nauseating prospect (as it is for most of us), we suggest investing in a robust long-term care insurance policy.

4. taxes

Income, interest, capital gains, and certain dividends are all subject to various tax rates. Taken as an aggregate, these taxes can get in the way of a stable and sufficient income, specifically because most people fail to take them into account while planning their retirements. Understanding how your income and assets are taxed can help you predict how much of your nest egg will end up in your pocket after Uncle Sam fills his own.

Once you have a read on your estimated tax burden, you can take steps to reduce it. Year-end and year-round tax planning allow you to leverage different strategies, such as capital loss harvesting, tax-deferral, and Roth conversions, in order to shrink your tax bill. With the help of a tax professional, you can determine which tax-reduction methods make sense for your specific situation. Then, in the lead up to April 15th, get in touch with a trusted tax preparer. While some of us may take preparing our own tax returns for granted, CPA’s and Enrolled Agents are quite literally certified in preparing returns that save you, the taxpayer, the maximum amount of money.

5.outliving your income

As a concept, retirement is a fairly recent development in human history. It was Otto von Bismark, the minister president of Prussia, who first suggested in 1881 that citizens over age 70 should receive financial support from the government. The idea was wildly popular since it offered an alternative to the most common retirement plan: working until you died. When Franklin Roosevelt imported von Bismarck’s idea to the U.S. in 1935, he lowered the qualifying age to 65. We now call this program Social Security. At the time, however, the average life expectancy was only 60 (for men) and 64 (for women). Now the average life expectancy is about 78.5 years—almost two more decades that Americans have to save for. What happens if you save enough for 20 years of retirement but end up living for 30 or 40?

Outliving your retirement income is called longevity risk. There are several strategies you can use to outwit the clock. The most important is to maximize your social security benefit, a guaranteed income stream. Many Americans mistakenly believe that 62 is the right age to claim social security. However, unless you are disabled, sick, or need the money immediately, we suggest waiting until you reach full retirement age—66 or 67 depending on the year you were born. If you claim your benefit before full retirement age, your social security income will be permanently reduced. Additionally, every year after full retirement age, up until age 70, that you delay claiming will bump your monthly benefit by an additional 8%. At our office, we offer free social security maximization consultations to help you determine the best way to file for your benefits.

This award was issued on 11/1/21 by Five Star Professional (FSP) for the time period 2/15/21 through 09/10/21. Fee paid for use of marketing materials. Self-completed questionnaire was used for rating. This rating is not related to the quality of the investment advice and based solely on the disclosed criteria. 3191 Connecticut-area wealth managers were considered for the award; 272 (9% of candidates) were named 2021 Five Star Wealth Managers. The following prior year statistics use this format: YEAR: # Considered, # Winners, % of candidates, Issued Date, Research Period. 2020: 3048, 285, 9%, 11/2/20, 2/17/20 - 9/18/20; 2019: 3147, 289, 9%, 11/1/19, 2/18/19 - 9/27/19; 2018: 3178, 293, 9%, 11/1/18, 2/15/18 - 9/21/18; 2017: 2218, 283, 13%, 11/1/17, 2/15/17 - 9/11/17; 2016: 1985, 417, 21%, 10/1/16, 3/25/16 - 9/28/16; 2015: 2398, 468, 20%, 11/1/15, 3/16/15 - 9/10/15; 2014: 3926, 515, 13%, 11/1/14, 3/16/13 - 9/10/13; 2013: 2263, 531, 23%, 11/1/13, 3/16/12 - 9/10/12; 2012: 2204, 503, 23%, 11/1/12, 3/16/11 - 9/10/11.
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Investment Advisory Services offered through SGL Financial, LLC, A Registered Investment Advisor. Insurance Services are offered through individually licensed and appointed insurance agents.

*Winners appearing on this page do not pay a fee to be considered or to win the Five Star Award. Professionals with a digital profile have paid a promotional fee.
Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers. The award is based on 10 objective criteria. Eligibility criteria-required: 1. Credentialed as a registered investment adviser (RIA) or a registered investment adviser representative; 2. Actively licensed as a RIA or as a principal of a registered investment adviser firm for a minimum of 5 years; 3. Favorable regulatory and complaint history review (As defined by FSP, the wealth manager has not; A. Been subject to a regulatory action that resulted in a license being suspended or revoked, or payment of a fine; B. Had more than a total of three settled or pending complaints filed against them and/or a total of five settled, pending, dismissed or denied complaints with any regulatory authority or FSP's consumer complaint process. Unfavorable feedback may have been discovered through a check of complaints registered with a regulatory authority or complaints registered through FSP's consumer complaint process; feedback may not be representative of any one client's experience; C. Individually contributed to a financial settlement of a customer complaint; D. Filed for personal bankruptcy within the past 11 years; E. Been terminated from a financial services firm within the past 11 years; F. Been convicted of a felony); 4. Fulfilled their firm review based on internal standards; 5. Accepting new clients. Evaluation criteria-considered: 6. One-year client retention rate; 7. Five-year client retention rate; 8. Non-institutional discretionary and/or non-discretionary client assets administered; 9. Number of client households served; 10. Education and professional designations. FSP does not evaluate quality of services provided to clients. The award is not indicative of the wealth manager's future performance . Wealth Managers may or may not use discretion in their practice and therefore may not manage their clients' assets. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by FSP or this publication. Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by FSP in the future. Visit www.fivestarprofessional.com.