Retirement Problems to Look Out For
It’s impossible to predict the future which leads to worries about what will happen when you retire. Let’s look at some possible stumbling blocks that could ruin your retirement and potential solutions for them.
- The stock market crashes. All of us probably have something invested in the stock market. The plan is to gradually liquidate these assets to help pay for our living expenses when we retire. We’re aware that the market doesn’t go straight up, and we should expect occasional downturns. If these occur just before or just after we retire that can be especially worrisome. In addition to watching our investment lose value, we also have less time to earn our losses back. Some protection can be provided by matching the risk in your portfolio to your comfort level. Balance your portfolio with relatively safe bonds (fixed income) and low risk stocks, and re-balance from time to time if your comfort level changes and/or the value of each asset changes. Avoid investing money you will need in the short term in the stock market. Use a checking or savings account, or a money market fund instead.
- My money will run out. As we tend to live longer, retirement may last for a thirty- or even a forty-year period. Obviously, this means more money will be required for us in our retirement compared with our parents. One possible solution is to hold off as long as possible before applying for Social Security. But this gets tricky. As you hold off you will receive a higher payment when you eventually submit but for a shorter time. If you grab Social Security as soon as you’re eligible, you will get a lower monthly payment but for a longer time. Consult a professional to help you work this our and get the best outcome for your specific situation. Consider buying an annuity (not my favorite) which will guarantee you a regular income for life. Annuities come in a dazzling array. Be sure to carefully study the advantages and disadvantages of each type before buying. Also look at taking out a reverse mortgage if you have built up a lot of equity in your house and plan on staying in your home. Again, watch out and investigate carefully. There are potential pitfalls.
- Inflation. A small rate of inflation over a long period of time can wreak havoc. The average annual inflation rate over the past 20 years is about 3%. That doesn’t sound bad; but the math tells us that at that percentage increase over a 20-year period prices will roughly double. Another way of looking at it is: $100,000 after 20 years would only buy $50,000 worth of goods. We have to balance out keeping some money safe and some money invested in assets that will keep pace with inflation. The stock market, properly done, is a good choice to be an inflation hedge since it has performed that role well in the past. (Some prefer real estate and commodities.) Also to combat higher interest rates, it would be a good idea to have zero credit card debt especially if it your credit card has a variable interest rate. Shop carefully to take advantage of sales and discounts. Pay cash for big ticket items instead of financing them at high interest rates.
- Increasing medical costs. Not only has health and medical spending increased by over 9% from 2019 to 2020 but this was much more of an increase than the 4.3% increase from 2018 to 2019. Nursing home care in 2020 runs over $100,000 per year and home care costs about $55,000 a year. A healthy lifestyle with lots of exercise is helpful, but not every illness can be avoided. It’s recommended that we all have a plan that includes long-term care. This can be insurance, a special savings account and/or a health saving account (HSA). Contributions to an HSA are tax-free. Also investigate the best Medicare options open to you.
One last word about retiring. Be sure to retire to something, not from something. It’s not desirable to retire and have nothing to do. Develop a hobby, or a part-time job before actually retiring.
Disclaimer — I am not a professional investment or financial advisor. This article only presents material for your information. This is not financial or investment advice. Seek professional advice before making any investment or financial decisions.