Retirement is a long journey with many twists and turns along the way. Like any road trip, we would love to see around every corner to prepare for any dangers that may lie ahead. Retirement is no different. We’ll look at five potential hazards that can cut your journey short.
- Market Downturns
If any part of your income is dependent on market performance, a market drop can be scary. The most impact is when you’re spending a certain percentage of your portfolio every year. The hope is that markets will always increase – we all know that is not how markets operate.
The most important return you'll ever have is the first year of retirement. The last thing you'll want to do is kick off your first year with a 25% drop in assets. Drastic portfolio income reductions can occur when companies cut dividends, and can also happen when interest rates drop.
Inflation is better looked at over long periods of time. While it increases at a faster rate for things like healthcare, it's stayed at a steady 3%1. Throughout retirement, inflation causes a slow erosion in the value of your money. At some point, retirees begin to notice their income is not going as far as what it once was.
For this reason, it is important to have some hedge against inflation. Investing broadly in the stock market can help to compliment your retirement plan.
- Healthcare Inflation
As stated before, Healthcare inflation increases at a faster rate than general inflation. This is otherwise known as the Consumer Price Index (CPI). Since 1990, Healthcare is almost double the rate of CPI at 6%.2
This is not only a reason to have assets with growth potential, but to also look at Long-Term Care Insurance (LTC). There are LTC policies on the market today with an inflationary rider. Essentially, the amount of coverage increases as expected costs increase.
- Tax Rate Increases
It is no secret that the U.S. has a debt problem, and it’s not going to go away without some changes. The current administration has promised pro-business tax reform along with major changes in the individual income tax structure. While we've yet to see these changes, the highest marginal tax rate sits at 39.6%.3 This number is low, relative to historical standards, but in the decades ahead, remains a very real possibility.
- Required Minimum Distributions (RMD’s)
The last on the list, RMD’s, can be an issue for those who aren’t spending from retirement accounts. At age 70.5, the IRS requires everyone to begin taking a portion of their retirement savings. For those who are spending from non-retirement accounts, or even taking a small portion of their IRA’s, this can create a tax issue.
In most cases, withdrawals from retirement savings are fully taxed as ordinary income. This means income that will put some in a higher tax bracket. There are ways to reduce the impact of RMD’s, but there is always a tradeoff.
While many of these risks are real possibilities and out of our control, there are ways to reduce impact. As we’ve said many times before, this is how a comprehensive retirement plan can help you be as prepared as possible for your journey.
If you don't have a retirement plan in place, please give our office a call. We'd love to help you schedule an appointment with one of our advisors today.
*The information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action.