Do you remember the last time you drove to a destination and were delayed by a roadblock? The delay can create added frustration not knowing exactly how long it will take to get through it.
Similar frustrating circumstances pop up in the years just before and just after retirement. During this new life transition, you are forced to confront retirement roadblocks, and if you don’t know how to maneuver around them, it can leave you feeling stuck.
During this episode, we discuss 3 retirement roadblocks you may encounter along your retirement journey. Think of these tips as 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 plays 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 during those first years of retirement, but there are ways to mitigate this risk.
To combat sequence of return risk, you’ll need to maintain a balanced portfolio similar to the way you maintain a balanced diet. Use the financial food groups! Make sure you have a healthy serving of vegetables (bonds and cash) to provide for your necessary withdrawals and monitor your financial junk food (speculative individual stocks and collectible assets) closely.
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.
One way to visualize how inflation works is by thinking about what the price of milk was 20 years ago. Inflation impacts not only the prices of goods but also 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
It’s also important 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. With thoughtful planning, you can reduce your lifetime tax burden.
Create Your Road Map to Help Prepare for These Retirement Roadblocks
When 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, please contact us.
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
- 10 Tips to Help With Multi-Year Tax Planning
- The Retirement Podcast Network
