Have you ever been on your way to an epic summer road trip and then all of a sudden you come upon a roadblock?
An unexpected work zone that is destined to add a half hour or more to your journey? The delay creates frustration with the shift in your original estimated arrival expectation.
These pop up in the years just before and just after retirement. During this new life transition, you are forced to confront roadblocks, where if you don’t know how to maneuver around them, it can leave you feeling stuck.
On this episode, Allison Berger joins us to discuss 3 not so obvious retirement roadblocks that you may encounter along your retirement journey. Maybe these tips can be your GPS to make it easier to navigate around the retirement roadblocks you will inevitably face.
Sequence of return risk
The order of your investment returns in the first years of retirement play a significant role in your long-term financial success .
This is known as sequence of return risk and it can negatively impact you when you experience several years of bad returns at the beginning of retirement while also starting to withdraw money. You might not be able to control your market returns in those first years of retirement, but you can find ways to mitigate this risk.
To combat sequence of return risk, you’ll need to maintain a balanced portfolio the way you maintain a balanced diet. Use the financial food groups! You’ll want to make sure you have a healthy serving of vegetables (bonds and cash) to provide for your necessary withdrawals and monitor closely your financial junk food (speculative individual stocks & collectible assets).
After maintaining a growth mindset in the accumulation stage of life by using a higher percentage of stocks, you may be hesitant to reduce your risk load in retirement. However, having a balanced portfolio can ensure that you won’t be forced to sell when prices are down.
Inflation
You want to ensure that your money will be worth something in retirement, but inflation reduces purchasing power over time.
We can visualize how inflation works by thinking about what the price of milk was 20 years ago. Inflation not only impacts the prices of goods but also impacts your retirement income. Even with the cost of living adjustments, your Social Security will not have the same buying power in 20 years.
Without an appropriate stock allocation, inflation could act as a silent assassin. It is most dangerous for those who are overly cautious. This is where developing a financial plan is vital. Understanding the withdrawals you’ll need in the first years of retirement, can allow you to confidently construct a balanced portfolio to fight inflation’s erosion of your purchasing power.
Unforeseen tax bombs
Equally important is to understand how different events can impact your taxes.
The best way to combat unforeseen tax bombs is through multi-year tax planning. Most people are focused on tax results of the past year, but retirement offers an opportunity to plan ahead. You can reduce your lifetime tax burden by thoughtful planning.
Create your retirement road map
If you put together a financial plan for retirement you’ll have a road map for the years ahead.
In retirement, you’ll want to become flexible and look for opportunities. This is part of what we do with our clients.
If you are interested in developing a GPS plan to help you through those retirement roadblocks, then check out our website and click Learn More.
Outline of This Episode
- [3:07] Sequence of return risk can ruin your retirement
- [9:45] Inflation could be the silent killer of retirements
- [14:14] Unforeseen tax bombs can derail your tax strategy
- [20:47] Today’s progress principle
Resources & People Mentioned
- Episode 89 – Sequence of Return Risk
Connect With Chad and Mike
- https://www.financialsymmetry.com/podcast-archive/
- Connect on Twitter @csmithraleigh @TeamFSINC
- Follow Financial Symmetry on Facebook
