By Grace S. Yung, CFP
Climbing Mount Everest represents the absolute pinnacle for many people. Getting to the peak of the world’s highest mountain is an extremely enviable feat—and one that many will even risk their very lives for. But did you know that most of the people who die trying to climb Mount Everest actually don’t do so on the way up? They die on the way down.
An analogy can be made about the way we plan for our retirement, as opposed to what happens after we get there. For example, we are constantly taught the strategies for saving and investing “for the future.” Many of us put funds into an employer-sponsored retirement plan. And some might even work with a personal financial advisor, trying to move toward that ideal “number” that will get us to our goal—the “summit.”
But then what?
Unfortunately, what many people don’t often plan for are the pitfalls that can happen on the way down. Dangers such as costly health issues, bear markets, and changes in the tax or Social Security laws. And many of us are even more unprepared to turn those savings that we’ve accumulated into a lasting stream of income that will support us for the remainder of our lives.
Strategies for Getting Down the Other Side of the Mountain
Perhaps you have saved and invested very successfully all of your life. But on the day that you retire, all of that changes. This is because on that day, you will need to start relying on those savings for your ongoing income stream.
Because people are living so much longer today, income in retirement needs to last much longer than it did several decades ago. Your money will not only need to be stretched out for an indefinite number of years, but it will also need to keep up with rising inflation so that you can continue to purchase goods and services in the future.
You will also need to ensure that you are prepared for any pitfalls that could pop up along the way. Just like those who are climbing back down a snow-covered mountain, you never know what to expect. For example, Boomer retirees can encounter any number of issues that can cause a shift in retirement spending—or worse, a drain on assets saved—if not properly prepared for.
One of the most costly issues is healthcare—whether it’s your own, your spouse’s, or that of a loved one. Unfortunately, many people often find out too late that Medicare only covers a bare minimum when it comes to long-term care costs. With regard to basic hospitalization and doctor visits, Medicare can require high out-of-pocket co-payments and deductibles.
If you become ill, or if you end up becoming a care provider for a loved one who becomes ill, you could find that your spending will increase and cause you to deplete your portfolio faster than you had originally intended.
The same could hold true if an adult child falls on hard financial times and needs to move back home. Expenses could rise, causing a shift in withdrawal rates. Depending on the situation, you could even find yourself having to go back to work on a part- or full-time basis in order to make up for the shortfall.
If you have all—or even some—of your portfolio invested in the stock market, there will still likely be volatility after you’ve retired. But unlike during your working years, a bear market can have a drastically different effect on your portfolio when you are taking withdrawals. A market decline in any given year could cause your portfolio to run out of money much earlier than initially anticipated.
For example, during our “accumulation” years when we are saving, we are taught to focus on average returns. While these are important, as you get closer to retirement, even just one bad year can have a significant effect on the amount that you will be able to draw from for your stream of retirement income.
Because of that, it’s important to consider moving more of your overall assets into lower-risk vehicles. That way, you will potentially be better able to generate the income you will need.
You’ll need to anticipate changes in various laws as you work your way through retirement. One law that recently affected retirees decreased their benefit payout for some Social Security recipients. For example, married couples used to take advantage of Social Security’s delayed-retirement credits simultaneously, allowing one spouse to let his or her credit build up while at the same time receiving the other spouse’s benefits. Under a new law that was passed in November 2015, this strategy is no longer allowed.
What If You Haven’t Saved Enough?
In some cases, an investor may look up at the summit of the retirement mountain and discover that they just haven’t saved enough to maintain the lifestyle that they had envisioned. If this is you, you’re not alone. We Americans aren’t good savers. According to a U.S. Government Accountability Office analysis of households with members who are age 55 or over, almost 29 percent have no retirement savings or traditional pension plans. In other instances, we may have saved enough, but we overspend.
In either of these cases, you will need to take a really hard look at spending and determine what is—and what isn’t—necessary. You may also need to look at other strategies, too, such as delaying your anticipated retirement date, delaying receipt of your Social Security benefits, or possibly working part-time during at least part of your retirement years.
Depending on your particular situation, diversifying your income stream can also be beneficial. For example, some investors find that rental income provides a good source of incoming cash flow in retirement.
Creating an Efficient Income Stream
Although many things have changed throughout the years in terms of the way we receive retirement income, the good news is that there are things you can do to set up and control your own personal plan now. Many of these things even come with tax advantages.
One important item to keep in mind is to consider strategies now that will be tax-efficient later. For example, Roth IRAs, Roth 401(k)s, and other Roth IRA alternatives can provide you with tax-free income in the future.
With a Traditional IRA and 401(k), because your contributions are typically made with pre-tax income and the growth is tax-deferred, your withdrawals will come out as taxable income—which can make a big difference in your living expenses in retirement. So having some income sources that are tax-free can really make a difference in your net retirement income.
Working with an advisor who is knowledgeable on tax-efficient retirement strategies can help you to set up a future income plan. Having a good, solid plan can also help you shield your retirement nest-egg from potential dangers such as disability, long-term care, or critical-illness expenses that can quickly deplete your long-term savings.
The Bottom Line on Climbing Your Personal Mount Everest
Just like climbing a snow-covered mountain, you need to be well-prepared for retirement. This not only means accumulating assets, but also planning for any pitfalls that could jeopardize the income stream you will need for the rest of your life.
Having an advisor who is well-versed in all stages of retirement planning can be valuable. And working with a professional who is focused on the LGBT community is also key, as they will be more in tune with issues that can affect your specific planning needs.
Personal finance-related questions may be emailed to [email protected].
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.