Many people dream about retirement, that next chapter of
life where you can explore your dreams and enjoy a comfortable lifestyle.
Living in retirement, however, often looks quite different on a day-to-day
basis, as retirees are not immune to facing financial challenges.
While some of these challenges might be familiar, like
living in an inflationary period, others are completely new. Let’s look at some
of the most common financial challenges and how retirees can prepare for the
expected and unexpected alike.
Loss of Identity
Retirees who have spent a significant amount of their lives
working, and enjoying the work they do, might be afraid to lose the identity
that took them a lifetime to create. This fear is often coupled with the
challenge of living on a fixed income, a transition that is often a far cry
from the salary raises and bonuses they were previously accustomed to
throughout their careers.
Kurt Heineman, financial planner at Vision Casting Financial
Planning, said while many financial planners recommend living on 80% of your
previous salary in retirement, it can still be a challenge for retirees to get
used to a reduction in expenses. Living on a fixed income is made all the more
difficult for retirees mourning the loss of their careers, pay and achievements
over the last 40 years.
While it often sounds nice to stop working, Heineman said
many people experience a sense of loss and grief when they retire.
In order to make the transition less challenging, Heineman
recommends considering your reason for retiring and your purpose in retirement.
Ask yourself the following questions.
How will you spend your time?
Who will you spend it with?
Will you travel?
Are their charitable organizations that you can share your
gifts and skills with?
“Answering these questions can help you have a sense of
purpose and helps you with knowing how to prioritize your budget and not
overspend in the first few years of retirement,” said Heineman.
Long-Term Healthcare Costs
Often, many people will retire before age 65. Those who make
this choice are not yet eligible for Medicare and are faced with the challenge
of paying for health insurance premiums. Even when eligible for Medicare,
retired individuals may find not all health issues or prescription costs are
completely covered by insurance. This results in the challenge of retirees
either self-funding these costs or finding supplemental insurance programs that
may fit their needs.
While it’s important to consider healthcare costs well in
advance before retiring, Mindee Kissinger, investment advisor representative at
OneDigital, said those already in retirement may partner with a financial
planner to ask questions and receive careful consideration and education about
healthcare topics.
Working alongside a financial planner may allow you to
determine which options are the best fit for you to close the gap between your
retirement date and Medicare eligibility, like COBRA or a spouse’s healthcare
plan if they are still working. Those who reach Medicare eligibility may
discuss with a financial planner what they need to know about Part A for
hospital costs (after deductible), Part B for additional medical costs with an
annual premium and Part C for prescription coverage.
“Unfortunately, I have seen many times where people in
retirement aren’t prepared for how high these costs can be,” said Kissinger. “I
suggest seeking out quotes for long-term care insurance as soon as possible, as
they generally get more expensive the longer you wait. Be sure to get multiple
quotes for amounts the policies would pay for monthly care, what facility
coverage is provided, as well as understanding the caps on how long the policy
would pay those benefits. Most financial planners should have a good
understanding of walking you through these options, and/or they will partner
with an insurance specialist to assist.”
Debt
While some people enter into retirement without debt, this
is not true of all retirees. People who enter into retirement with debt may
struggle to pay it off and find it puts a strain on their golden years.
Katie Ross, executive vice president for American Consumer
Credit Counseling (ACCC), recommends retirees struggling with debt consider
free credit counseling.
“A credit counselor can help people strategize a way to save
money or reduce expenses to try to free up money for paying debt,” said Ross.
“They can also refer retirees to other government resources for further
assistance.”
Sequence Risk
Sequence risk, also known as sequence of returns risk, is
the risk that comes from the order in which your investment returns occur.
“This risk largely matters for those entering, or already
in, retirement,” said Kissinger. “Large drawdowns in returns at the same time
withdrawals are being made can potentially reduce the longevity of your
investment portfolio, sustaining future income.”
Sustaining income is one of the most discussed concerns
among retirees. In a period of increased market volatility, which has been seen
throughout 2022, people have heightened concerns about their future income.
Retirees working with financial planners to address their
healthcare concerns would be wise to work alongside professionals that
understand portfolio construction and financial market trends. Kissinger
recommends having a clear withdrawal goal set and managing your investments in
an asset allocation set specific to that goal.
“If a market drawdown were to occur, the risk budget of that
allocation should not exceed your maximum loss,” said Kissinger. “Other
strategies that help mitigate sequence risk include bucketing cash for one to
two years of income, equity loans, reverse mortgages or laddering bond
portfolios.”
As a side note, remember that these options come with
various risks and expenses. Each should be carefully considered with the
assistance of a financial advisor, tax professional and estate attorney.
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