Top Six Red Flags That Impact Your Planning for Retirement

What are the retirement-related red flags and how do they impact your lifestyle and financial security during your retirement years?

Everyone wants a comfortable, secure retirement—and if you’re married, you want it to last for the lifetimes of both spouses. It can take years of planning, saving, investing, and risk management for this goal to become a reality years in the future.

Over longer periods of time, there are several variables (recession, inflation, stock market declines, interest rate fluctuations) that can impact the achievement of your retirement goals. VIA Wealth can help you develop a retirement plan that addresses these red flags and helps you pursue your goals.

What are the top six red flags?

Did you start your retirement planning process soon enough?
Do you have a realistic retirement plan based on conservative investment assumptions?
Does your current retirement plan prepare you for rising longevity?
Can you retire when you want to and live the way you want to?
Are you exposed to excessive investment risk during your transition years?
Will you run out of retirement money late in life?

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Did You Start Your Retirement Planning Process Soon Enough?

One potential red flag is delaying your retirement planning process because you have other priorities for your money (such as, for example, buying a home). The longer you procrastinate, the more money you will have to save later in life.

It is never too early to start accumulating assets for retirement. Similarly, you can never accumulate too much money. The more money you save, the more security you will have later in life when you need it the most.

You don’t have a choice in regard to contributing to Social Security. However, you do have choices when it comes to accumulating assets in 401ks and IRAs.

Red Flag: Waiting until it is too late to start accumulating assets for your retirement years.

Do You Have a Realistic Retirement Plan Based on Conservative Investment Assumptions?

Retirement planning is about the future, so it has to be based on several assumptions. At the same time, these assumptions can be more aggressive or more conservative. For example, how much income will you need when you retire? A percentage of that number will be covered by Social Security.

The rest will be savings in retirement plans (401k), IRAs, and personal savings accounts. For example, let’s assume that your income requirements during your early retirement years average $100,000. This will be funded by your savings.

Next, your retirement plan assumes that you will be taking 4% distributions from your assets to fund your lifestyle. Your savings must accumulate $2.5 million of assets to fund this distribution amount.

A couple of other retirement plan assumptions are also important. For example, what is the rate of return that you assume you will earn on your investments? If you assume an 8% return minus the 4% distribution that funds your cost of living, you have a net return of 4%. This is before you calculate the impact of inflation and expenses.

Now, let’s assume your inflation assumption is 3% (impacts the purchasing power of your assets) and your expense assumption is 1%: If you earn 8%, your assumptions show you should break even over longer periods of time and you should never run out of money.

Red flag: What if your more aggressive assumptions are wrong? The more conservative these retirement planning assumptions are, the better.

Does Your Retirement Plan Prepare You for Increasing Longevity?

There are numerous unknown factors to deal with when you plan for retirement. Two of the biggest of these are the lifespans of both spouses and your relative health later in life. A more conservative retirement plan will assume longer lifespans. Meanwhile, a more aggressive retirement plan will assume shorter lifespans.

Why increased the increase in expected longevity? Medical science and pharmaceutical companies are making great strides in protecting us from diseases that had higher mortality rates in the past. There is even the possibility they will be able to slow the aging process in our lifetimes.

Your retirement plan has to assume that one or both spouses will outlive their parents and grandparents. There is less financial risk if you have shorter lifespans. Predictably, there is more financial risk if you have longer lifespans.

Red flag: A failure to plan for longer lifespans can impact the number of assets that you will need to produce income later in life.

Are You Exposed to Excessive Amounts of Investment Risk During Your Transition Years?

One of the primary retirement planning assumptions is often the time period in which you plan to stop working or sell your business. This could be a fixed date that is relatively inflexible. Or, it could become a flexible date as you get closer to retirement.

Either way, it is an important consideration: What if your retirement date happens to be 12/31/22? That day coincides with high U.S. inflation, a pending recession in 2023, and a 25% decline in the stock market from 2022. How will these economic and investment events impact your retirement date and your lifestyle?

How dependent are you on the assets you have accumulated for retirement? The events above may not matter if you have accumulated excessive assets or may be inheriting a large sum of money.

However, if neither of these is the case, you may be very dependent on this money. So, you need a more conservative strategy to make sure your assets will fund your desired lifestyle.

Red flag: You are exposed to excessive amounts of risk during the three to five years before and after your retirement date.

Will You Run Out of Retirement Income Late in Life?

Again, medical science can extend your life expectancy. The unfortunate drawback is that the extra time might be spent in an assisted living, skilled nursing, or memory care facility. All three are relatively expensive today.

In the future, these types of care will be even more expensive as the 76 million baby boomers age and require these types of services. Your conservative retirement plan should assume one or both spouses will require these services.

This is kind of a win-win: Assuming you need them means being prepared, if you do. If you don’t need them, your children will inherit more assets. Acquiring a Long Term Care insurance policy during your mid-working years is another way to prepare for this possibility.

A wise investment strategy that covers all the bases (distributions, inflation, expenses) and produces a positive rate of return should never run out of money. Bad financial advice, poor investment returns, and excessive expenses can erode your asset base so you risk running out of money late in life.

Red Flag: Your retirement plan can be derailed by excess expenses late in life.

For experienced insights on market-weather-proofing your retirement planning, protecting your financial legacy, and more, schedule a meeting with ViaWealth today.