Article by Jay Tyner, RFC®
A Certified Financial Planner™ (CFP®) is typically committed to helping their clients make informed decisions about their finances, equipping them with the tools they need to secure a prosperous future. Over time, it has been observed that one concern frequently tops the list for individuals nearing or contemplating retirement: the dread of “going broke.”
Such anxiety is not baseless. Retirement funds may need to cover living costs for potentially many decades, a daunting prospect given the unpredictability of factors such as inflation, healthcare expenses, and life expectancy. However, with meticulous planning and judicious financial practices, it’s possible to significantly diminish the risk of exhausting retirement savings. Here are some suggestions from a CFPs® perspective:
1. Assess Retirement Needs:
Retirement planning begins with a candid evaluation of an individual’s needs and objectives. Do they wish to travel? Do they plan to support family members? Are there hobbies they desire to pursue? Spending patterns are likely to change during retirement, and understanding these changes can help shape a successful savings strategy.
2. Encourage Portfolio Diversification:
A diverse investment portfolio can assure steady growth of savings over time, striking a balance between risk and reward. It is advisable to invest in an array of assets such as stocks, bonds, real estate, and potentially, alternative investments, to stimulate potential growth and income during retirement.
3. Prioritize Longevity Planning:
As life expectancy increases, planning for a retirement that could span 30 years or more is crucial. This might involve various strategies like delaying Social Security benefits, purchasing annuities for guaranteed income, or establishing a conservative withdrawal rate from retirement funds.
4. Hedge Against Healthcare Costs:
Healthcare expenses can significantly impact retirement funds. A viable solution can be to invest in a Health Savings Account (HSA) during an individual’s working years, if eligible. These funds can be withdrawn tax-free for qualified medical expenses, providing a valuable safety net against future healthcare costs.
5. Establish a Sustainable Withdrawal Strategy:
A commonly adopted guideline is the 4% rule, suggesting a withdrawal of 4% of the portfolio in the first year of retirement, with the amount adjusted for inflation in subsequent years. While this serves as a useful starting point, everyone’s situation is unique, and a financial advisor can help tailor a strategy that considers the individual’s specific circumstances and risk tolerance.
6. Implement Tax-Efficiency:
Tax obligations don’t cease upon retirement; they just change. Strategically withdrawing from tax-deferred and taxable accounts can help manage tax burdens during retirement. This process requires thoughtful planning and, potentially, the advice of a tax professional.
7. Promote Vigilance About Spending Habits:
Maintaining a budget isn’t limited to the working years. Tracking spending during retirement is critical to ensuring that savings endure. Consider collaborating with a financial advisor who can provide regular evaluations and assist in adjusting plans as necessary.
8. Maintain an Emergency Fund:
Even in retirement, unexpected expenses can occur. Possessing a cash reserve can protect against the need to sell investments or withdraw from retirement accounts during a market downturn.
Retirement should be a time of enjoyment and fulfillment. While the fear of “going broke” is understandable, it’s important to remember that careful planning and sensible financial management can greatly mitigate this risk. A CFP® would typically advise seeking professional help if there’s uncertainty about retirement strategy. Financial planners are equipped with the knowledge and experience to guide individuals towards a financially secure retirement.
The information contained herein is for educational purposes only. It is not intended to provide, and should not be relied on for, any tax, legal or investment advice. You are advised to seek the advice of a qualified professional prior to making any decision based on any specific information contained herein.
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