How to Avoid the BIG Retirement Risks

​Retirement is just as much a leap of faith as any other significant life change. No matter how much you prepare, you will only really understand all the implications when you start your new life. That’s one reason we believe that the first requirement of a good retirement plan is that it needs to be flexible enough to efficiently encompass changes in your life as you adjust to your new situation.

How do we get to maximum flexibility? It starts with avoiding retirement risks. The more your plan can accommodate predictable events or situations, the greater your ability to adjust to the unpredictable.
​

Making Sure You Don’t Outlive Your Money

The Social Security Administration reports that the average life expectancy for a man reaching age 65 in 2023 is just over 84 years, and for a woman, it is almost 87 years. A twenty-year retirement is a norm now, and for many people, it can be a decade or more longer than that.
​

Expenses in retirement are often high during the early, active years. In the middle years of retirement, costs may drop. But longer life expectancy ordinarily means increased expenses to pay for health care in the last years of retirement. Returning to our 65-year-old couple above, Fidelity estimates that healthcare expenses may be approximately $315,000 throughout their retirement – over and above Medicare.
​

How do you mitigate this longevity risk?

​​It comes down to three things:

• Keep a careful eye on expenses and update budgets regularly


• Maximize guaranteed income by delaying claiming social security


• Invest with a bucket strategy for short-term, mid-term, and long-term needs. This investment strategy allows you to keep capital growing for long-term needs and to ensure you have what you need in the short term without liquidating investments at a loss.
  ​

Keeping an Eye on Inflation – But Not Too Close

The high levels of inflation we’ve seen in the last couple of years are hitting everyone’s wallet. But taking a longer view, over the previous 50 years to 2021, inflation has averaged about 3.8% annually. The stated goal of the Federal Reserve is for inflation to remain around 2% annually.
​

Building an income strategy around today’s high inflation could take too much income out of your plan in the early years. It’s also good to go beyond the statistics and consider how inflation affects you. High inflation rates aren’t as much of a threat for many retirees. As social security is indexed to inflation, some income will remain constant. Retirees also may have a smaller outlay on things impacted by inflation than people still in their working years.
​

Include a modest assumption for inflation in your income planning, and for temporary spikes, some remedial budget-cutting is probably enough to keep you on track.
​

Paying Attention to Your Taxes

You’ll be in a lower tax bracket in retirement, right? Well, maybe. You don’t have the same deductions as when you were working, and once you hit 73, required minimum distributions (RMDs) turn your tax-advantaged savings in 401(k)s and IRAs into big chunks of taxable income. And if your earnings get too high, you may end up paying a tax on Medicare through the IRMAA, which kicks in at higher income levels.
​

You don’t have to give up control of your income if you plan. You can deploy several tax strategies, particularly in the early retirement years. One of the most advantageous is a Roth conversion, which allows you to take money from your tax-efficient accounts over several years when your income is low, pay the taxes, and then reinvest in a Roth account. Roth accounts grow tax-free, and no taxes are due when you withdraw the funds.
​

The key is to take a multi-year planning approach. The goal is to even out income streams to keep taxes as low as possible.
​

The Bottom Line

Retirement changes your mindset from being a saver to a spender as you begin to live on the nest egg you accumulated. You won’t have income from work, but you will have more freedom. For many retirees, the newfound freedom opens new doors. Ensuring you can make your retirement assets match your retirement lifestyle means mitigating the risks.

Disclosure information

FairChild Capital is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FairChild Capital and its representatives are properly licensed or exempt from licensure. FairChild Capital does not provide legal, accounting, or tax advice. Please consult your attorney or tax professional for such matters.