There are lots of things that could go wrong in retirement. You might develop a health problem, spend down your savings too quickly or experience considerable investment losses. Here’s how to cope with some of the major challenges you might encounter in retirement.
Not enough savings to retire. If you’re in your 50s or 60s and aren’t on track to save enough to retire comfortably, it’s time to become a super saver. Savers age 50 and older can defer taxes on as much as $24,000 in a 401(k) and $6,500 in an IRA, $6,000 and $1,000 more, respectively, than younger workers. Or you could make after-tax contributions to a Roth 401(k) or Roth IRA to set yourself up for tax-free withdrawals in retirement. If you make a commitment to completely max out your 401(k) by saving $24,000 per year between ages 55 and 65 and earn a 5 percent annual return, you would accumulate $309,984 over the 10-year period. And if your employer provides a 401(k) match, you will be able to accumulate an even bigger nest egg. However, depending on your salary, it might require some significant sacrifices to accumulate a substantial nest egg in the few years leading up to retirement.
Outliving your savings. Your retirement savings needs to last for an unknown number of years. A man turning 65 in 2016 can expect to live an average of another 19 years, according to Social Security Administration estimates. A woman the same age has an average life expectancy of nearly 22 more years. But there’s certainly the possibility that you will live longer than average, which is even more years of retirement you need to find a way to pay for.
Your first line of defense against running out of money in retirement is Social Security. These payments continue for the rest of your life, even if you live past age 100. “We try to delay their Social Security benefit to age 70 to try to get their highest Social Security benefit on a monthly basis,” says David Stull, a certified financial planner for Storehouse Financial in Fort Worth, Texas. “It has a built-in cost of living adjustment, and it is a pretty good deal.” Taking steps to maximize your monthly payments by delaying when you sign up for benefits and coordinating benefits with a spouse will pay off over your lifetime if you end up living into old age.
Some financial products, such as immediate annuities and charitable gift annuities, also promise a stream of lifetime payments, but you will need to hand over a chunk of your savings to an insurance company or nonprofit, and they sometimes have high fees and complicated fine print. “Buy an annuity from an insurance company that will guarantee you a lifetime income,” says Cindy Levering, a retired pension actuary in Baltimore and member of the Society of Actuaries committee on post-retirement needs and risks. “The problem with them generally is people aren’t going to want to take their whole pile of money and convert it to an annuity because that doesn’t allow them the flexibility for shocks that happen.”
If you plan to use your savings to pay for retirement, you will need to devise a sensible draw down strategy that prevents you from depleting your balance too quickly. “You have to manage the investments and you have to manage the draw down so you are not taking out too much at any one time,” Levering says.
Investment losses. A significant investment decline in the early part of your retirement can be devastating to your long-term finances. To prevent this, many retirees begin to gradually shift their assets into more conservative investments in the years leading up to retirement. Some financial advisers recommend keeping several years of living expenses in safe investments so that longer-term investments have time to recover before you sell them. “Make sure that your next three to five years of cash flow needs are covered, and then you can afford to ride a little bit more with the rest of your portfolio and take a little more risk,” says Allison Berger, a certified financial planner for Financial Symmetry in Raleigh, North Carolina. “You don’t want to have to sell in a bad market. You want to be able to sustain those short-term losses and allow it time to recover.”
Inflation. The purchasing power of your retirement savings will gradually erode over time. However, there are a couple of ways to keep up with inflation. Your Social Security payments will be automatically adjusted for inflation each year. Maximizing your Social Security payments will also increase the dollar value of your inflation adjustments. Some types of government bonds are also guaranteed to increase in value with inflation. Financial advisers often recommend keeping some of your long-term retirement savings in equities as a hedge against inflation. “Everybody should have a little bit in stocks, even an 80-year-old and even if it’s just 5, 10 or 15 percent of their portfolio,” Stull says. “It will help your portfolio over the long run to get a better return.”
Significant health problems. You can protect yourself from excessive medical bills by signing up for Medicare during the three months leading up to your 65th birthday and purchasing a supplemental policy to fill in some of the gaps of traditional Medicare. A Medicare Part D plan provides prescription drug coverage, although you will need to compare plans every year to make sure your medications will continue to be covered at an affordable price. However, extensive long-term care in a nursing home or assisted living facility is only covered by Medicare for a limited amount of time. Low-income retirees might qualify to have their long-term care expenses covered by Medicaid. Retirees with some assets, but not enough to comfortably afford a long-term stay in a nursing home, could purchase a long-term care insurance policy. “If you need nursing care in a facility, obliviously that is very expensive,” Berger says. “You should think about purchasing long-term care insurance, especially if you have a family history of Alzheimer’s disease or other family members who have required long-term care.”