Atlanta Financial Newsroom

On The Road To Retirement, Beware Of These Five Risks

AFA
October 23, 2018

On your journey to retirement, you’ll likely face many risks that have the potential to throw you off course. Following are five common challenges retirement investors face. Take some time now to review and understand them before your journey takes an unplanned detour.

1. Traveling aimlessly

Setting out on an adventure without a definitive destination can be exciting, but probably not when it comes to saving for retirement. As you begin your retirement strategy, one of the first steps we help clients with is identifying and quantifying their goals. We start by helping clients envision what their lifestyle and spending needs might be in retirement. Once  you have defined your vision, an essential next step is tracking your current spending so that you can then adjust up or down for planned changes in lifestyle. Relying on old-fashioned rules of thumb that assume you will spend less in retirement than while working can be especially dangerous.  We find some clients actually spend more due to increases in travel and leisure time, for example, or higher health care costs.

Once you have defined your vision and set your goal(s), next we help you consider the impact of a number of other factors -whether you will continue to have earned income, your health and projected health care costs, expected longevity and long term care needs, Social Security benefits, any traditional pension benefits you or your spouse may be entitled to, the impact of inflation, and others. Once these factors are considered, we can help you determine how much you may need to accumulate.

2. Investing too conservatively…

Another key to determining how much you may need to save on a regular basis is targeting an appropriate rate of return, or how much your contribution dollars may earn on an ongoing basis. Afraid of losing money, some retirement investors choose only the most conservative investments, hoping to preserve their hard-earned assets. However, investing too conservatively can be risky, too. If your investment dollars do not earn enough, you may end up with a far different retirement lifestyle than you had originally planned.

3. …Or too aggressively

On the other hand, retirement investors striving for the highest possible returns might select investments that are too risky for their overall situations. Although a diversified portfolio generally contains a variety of investments, titling too heavily toward more aggressive investments can leave your investments subject to high levels of volatility.  While at least some investment in growth-oriented vehicles is essential if you hope to keep pace with or outpace inflation, the amount you invest in such higher-risk vehicles should be based on a number of factors. Some things to consider include how much risk you NEED to take to meet your savings goal, your time horizon (or how much time you have until retirement), and your ability to withstand changes in your account’s value. Would you be able to sleep at night if your portfolio lost 10%, 15%, even 20% of its overall value over a short time period? These are the types of factors we help you  consider when choosing an investment mix.

4. Giving in to temptation

On the road to retirement, you will likely face many financial challenges as well — the unplanned need for a new car, an unexpected home repair, an unforeseen medical expense are just some examples.

During these trying times, your retirement savings may loom as a potential source of emergency funding. But think twice before tapping your retirement savings assets, particularly if your money is in an employer-sponsored retirement plan or an IRA. Consider that:

  • Any dollars you remove from your portfolio will no longer be working for your future
  • You may have to pay regular income taxes on distribution amounts that represent tax-deferred investment dollars and earnings
  • If you’re under age 59½, you may have to pay an additional penalty tax of 10% to 25% (depending on the type of plan and other factors; some exceptions apply)

For these reasons, we help you carefully consider all of your options before using money earmarked for retirement.

5. Prioritizing college saving over retirement

Many well-meaning parents may feel that saving for their children’s college education should be a higher priority than saving for their own retirement. “We can continue working, if needed,” or “our home will fund our retirement,” they may think. However, these can be very risky trains of thought. While no parent wants his or her children to take on a heavy debt burden to pay for education, loans are a common and realistic college-funding option — not so for retirement. If saving for both college and retirement seems impossible, consider speaking with a financial professional who can help you explore the variety of tools and options.

If you are nearing retirement and feel its time to fine-tune your plan, reach out to your advisor today to learn more about our Retiring FITT program, which is designed to help make the often scary and confusing process of retiring both manageable and successful.

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