There are many things that can derail your retirement, and many of them have to do with money. Some of them are self-inflicted, like failing to save properly or using your 401(k) like a piggy bank.
But even for people who do everything correct, there are things – sometimes outside of their control — that can have a negative impact on your retirement.
The things on this list can affect anyone’s retirement, even those who’ve saved and done things correctly. It requires planning to help you prepare for when and if these things happen to you. And your first step should be to seek out qualified financial professionals, which could include tax advisors, attorneys, insurance agents, and/or registered investment advisors or Registered Representatives.
- Health care costs. People tend to underestimate both the costs of health insurance and health care.
People also underestimate the costs associated with Medicare, especially the co-pays and the costs of Part B, which is based on income. One of the biggest surprises occurs when people retire before they are eligible for Medicare and no longer come under the umbrella of their former employer. If they aren’t covered by a spouse, they have to go on the open market – and that can be very expensive.
“When people retire before 65, they come in and say had I known that it would cost I don’t know that I would have retired,” says Alicia Lewis, co-founder of Layman Lewis Financial Group in Loveland, Colo. “That is one thing that if you are neglecting to look at that, it will be an expensive cost to them until they are 65. The lesson is if you don’t have a plan, it can cost you a lot of money. People say I had no idea if they are not planning.”
Even after 65 the costs can be enormous. Fidelity Investments estimates that a 65-year-old will spend $10,000 on health care costs in the first year of retirement. Fidelity also says a 65-year-old couple retiring this year will need $280,000 to cover health care costs in retirement.
- Not having a steady stream of income. This basically means being able to depend on a check that comes every month or every quarter, not matter what. Reid Abedeen, managing partner at Safeguard Investment Advisory Group in Corona, Calif.,says “Not having an income stream can derail everything else. If I don’t have that consistent income steam, I’m having to sell (equities) if the markets are down. I don’t have the luxury to hold out. That can derail my investment plan. It’s very important you have a balanced approach.”
A pension or an annuity* can provide a source of income. Another example is Social Security, but the average Social Security check is only $1,404, according the U.S. Social Security Administration.
- Many people, including recent retirees, often forget that an IRA or 401(k) is a tax-deferred account, not tax-free. That means if your 59 ½, you can take the money out of the accounts without penalty, but you still have to pay the taxes. That can drastically reduce your withdrawal amount.
Abedeen says it’s a big mistake to not have a strategic plan to keep you taxes under control.
A conversion involves rolling your traditional 401(k) or IRA into a Roth and paying the taxes now. Then, your withdrawals in retirement would be tax-free (because you’ve already paid the taxes).
Note: it is generally preferable that you have funds to pay the taxes due upon conversion from funds outs of your IRA. If you elect to take a distribution from your IRA to pay conversion taxes, please keep in mind potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.
- “Making sure your expenses are under control within your game plan is important,” says Abedeen. That (debt) can wreck anything. We know successful stars and athletes who have made tens of millions only to go bankrupt. It had nothing to do with assets. It had everything to do with expenses and debt.”
According to a report by Magnify Money, both the percentage of older Americans carrying debt and the amount of debt they’re carrying are increasing. Today, 42% of Americans 56 to 61 have debt, and with an average of $17, 623.
- Retirement vs. Accumulation. Lewis says before anyone pulls the trigger on retirement, they should be talking to an advisor who specializes in retirement. “The other biggest concern is people say I talked to advisor and they say the same thing. They are working with an accumulation specialist. You are not in accumulation years any more. You are in preservation. Preserve your money. And then you have distribution.
“When you are working with an accumulation specialist, that can lead you down a road of harm,” she says. “Their number one thing to say is sit back and it (the market) will come back. In retirement, you don’t have the time for it to come back. You don’t have 40 years. You are using that as income. We live in a world of specialist. If you go to family practitioner and they say your heart is beating fast, they will send you to a cardiologist. .”
*Annuities are insurance products that can provide guaranteed income. They may be subject to surrender charges and holding periods. Annuity guarantees are backed by the financial strength and claims paying ability of the issuing carrier.
This article is for informational purposes only and is not intended to provide any specific advice. We encourage you to meet with qualified financial, tax, and/or legal professionals.