After spending years setting aside income each month to build up your nest egg and diligently plan for your future, there are still unforeseen events that can threaten your wealth as you near retirement age. While some threats may seem obvious, there are others that may sneak up on you when you’re least expecting it and compromise your wealth once you’re in or nearing retirement.

Of course, things can always go wrong and normal life occurrences don’t just stop because you’re retired, so being aware of some of the most common threats to your wealth can help prevent such things from eroding your wealth. While certain people and professions may be at a higher risk of certain threats, there are many that apply to the majority of people. Continue reading to learn about some of the most prevalent ways that your wealth can be at risk, and what you can do to combat them to preserve your retirement fund.  

Don’t let these risks threaten your wealth in retirement:

1. Running out of money

It may be a pleasant surprise that you live longer than you had expected to, though this isn’t entirely positive for your retirement fund. Living more years than you forecasted for your retirement, sometimes referred to as longevity risk, can mean you run out of money when you still have years left to live.

On the other hand, maybe you run out of money because you underestimated the level of spending you would require while in retirement. Many assume that once you enter retirement you will start spending less, but this oftentimes isn’t the case, as many begin to spend more on travel, activities, and medical care.

Everyone has a specific standard of living for their lives, so make sure you are accurately assessing your life expectancy, how much you want to spend each month, and some professionals even recommend planning to live to see 100 years. Adding extra years to your life is always a bonus, though you should make sure it doesn’t become a retirement income threat where you have to live out your final years pinching pennies. Plus, be honest with yourself about how much money you will need to allocate for spending each month in order to maintain the standard of living that you enjoy.

2. Irrecoverable portfolio loss

It’s everyone’s worst nightmare– after years of planning for retirement and making adequate monthly contributions to build up a respectable retirement account, the market plummets, and the investments in your portfolio suffer tremendously. This especially hurts if you had only planned to pull a specific percentage out of your fund each year to live off of, with 4% being the typical rule of thumb. In this case, a 50% drop in the market could mean that you can only pull out half the amount you had previously expected to live off of.

If you hold a large portion of your wealth in equities or mutual funds, you face the risk that leading up to your retirement, some holdings in your portfolio will fall in market value and throw your retirement plans into disarray. You can plan to the best of your abilities, though unforeseen events can always occur that prove detrimental to your portfolio, like what occurred in 2000 and 2008. 

There are a few ways to help prevent a bear market from ruining your retirement plans, one of those being to make sure your risk profile adjusts throughout your lifetime and turns much more risk-averse as you near retirement age. Diversifying your holdings and keeping some of your wealth in assets outside of the stock market can also prevent a retirement income threat, and avoid holding a large portion of your equity in the company where you’re employed. 

3. Inflation

A factor that’s vastly impacted life in recent months, inflation is a great danger to your wealth. Just over the past year, inflation has risen 7%, and it may not be easing anytime soon. Though it may be invisible and go unrecognized, it is still a major threat to your nest egg and your way of life once you’re receiving a fixed income.

A recent survey noted that 25% of Americans in 2021 saw inflation as the greatest risk to their retirement accounts, up from only 8% in the previous year. So while you can’t prevent inflation from occurring, you should stay aware of the impact it can have on your retirement account over time, and expect certain costs to increase down the line.

4. Medical needs

As you age and near or enter retirement you may have some extra time on your hands, but your health and medical needs may become more pressing and potentially threaten your wealth. A recent study noted that a 65-year old couple retiring now will need over $300,000 to spend on out-of-pocket medical expenses during retirement, assuming you’re covered by Medicare, and not considering costs for long-term care or nursing homes. This figure is likely to only increase as the years progress.

Between hospital bills, prescription costs, and possible nursing home payments, medical attention received in older age can really rack up and erode the wealth you’ve built over decades. Plus, you need to remember that Medicare often doesn’t cover long-term care or nursing home stays, though it is now estimated that 70% of people over 65 will require long-term care at some point in their lives.

While unexpected medical expenses may threaten your wealth, you can protect yourself by making sure you’ve set aside money for such costs, and you’ll need to keep in mind any specific pre-existing conditions you have that may bring these expected costs even higher. You can also consider opening a health savings account, or an HSA, while you’re still working. These accounts let you pay for medical expenses tax-free, and can be a great supplement to your other retirement accounts.

5. Housing

Our homes are a central part of our lives, and as we get older and our families expand they can hold many of our most precious memories. However, choosing not to downsize or holding a mortgage into retirement can become retirement income threats.

Though you may hold much sentimental value in the home you’ve had for decades, when the house becomes oversized for a couple and the upkeep costs and property taxes continue to rise while you’re on a fixed income, it could threaten your wealth. In addition, buying a new home when you’re nearing retirement may not be feasible for all, and having an additional monthly expense as you enter retirement may cause you to forgo other spending habits in order to stay on budget.

While the stress of moving or the hesitancy you have to sell the family home may come into play, really consider the financial burden that comes with either option and act accordingly. Moving into a smaller home can be an exciting part of this new chapter in your life, and it may be a more budget-friendly option for your retirement.

6. Threat of legal action

While not necessarily something that most people expect or even plan for, life can take some interesting turns, and you may face the threat of legal action once you’re in or nearing retirement age. This may pose a larger risk to people of certain professions, like doctors or business owners, though people in any career should be aware of this potential retirement income threat both in their professional and personal lives.

No matter what the complaint may be or the nature of your work, there are ways you can protect yourself from these events drastically eroding your wealth. Commonly-used policies that can protect you include umbrella policies, worker’s compensation, facility insurance, office overhead, and malpractice, life, or disability insurance. These policies can really protect business owners and those in the medical profession from facing unwanted litigation and can help lessen the financial burden in the case of any legal action by employees, clients, or patients.

7. Unexpected costs

Of course, a common threat to any nest egg is the possibility for large and unexpected costs. Such expenses could include replacing the roof, needing to buy a new car, or helping out family members in a time of need. Regardless of the nature of the cost, it’s important to remember that life doesn’t stop just because you’ve entered into retirement.

In your budget, plan for some extra expenses to arise each month so you are not left surprised when they occur or scrambling to take out a loan to cover the costs. This can be very detrimental to your retirement account or even impossible to secure when you’re on a fixed income. In sum, emergencies and unanticipated events are going to happen, so keep this in mind when planning for your retirement so they don’t threaten your wealth.

Retirement should be enjoyable and let you have more time on your hands, so make sure you are financially ready to enjoy it to the top of your standards. Above all, the important thing to keep in mind is that there are many risks out there that you can duly prepare for and protect yourself from. While any one of the risks may not set you back completely, taken together, a few of these events occurring at the same time can really threaten your wealth.

You are not completely hopeless when it comes to the abovementioned retirement income threats, and giving yourself plenty of cushion and overestimating the money you will require throughout your retirement are clear ways to give yourself a defense against many of the risks you face. Speaking with your financial advisor or planner and frequently updating them on any pertinent life changes or emerging information about your legal standing or health can help them keep you prepared for retirement and living your life to the top of your standards. [1] 

If you have retirement questions you would like answered, please schedule a complimentary Zoom meeting or email us. We would love to help if we can.

Sources:
https://www.cnbc.com/2022/01/12/cpi-december-2021-.htmlhttps://www.forbes.com/sites/mikepatton/2015/11/30/the-five-most-important-threats-to-your-financial-life/?sh=4e4a67b9295bhttps://www.entrepreneur.com/article/287397https://abcnews.go.com/Business/retiring-couple-220000-health-care-fidelity-study/story?id=19185055https://www.investopedia.com/retirement/how-plan-medical-expenses-retirement/#:~:text=A%2065%2Dyear%2Dold%20couple,Retiree%20Health%20Care%20Cost%20Estimate.
https://www.wsj.com/articles/the-odds-on-needing-long-term-care-11559836590https://www.thestreet.com/markets/history-of-stock-market-crashes-14702941

https://www.cnbc.com/2021/12/13/more-americans-see-inflation-as-the-greatest-risk-to-retirement-plans.htmlhttps://www.healthcare.gov/glossary/health-savings-account-hsa/

Disclosures:
While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP)-generally a health plan (including a Marketplace plan) that covers preventive services before the deductible. Some health insurance companies offer HSAs for their HDHPs. Check with your company. You can also open an HSA through some banks and other financial institutions. Source: https://www.healthcare.gov/glossary/health-savings-account-hsa/

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Neither Independent Financial Group (IFG) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of IFG or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.

For Educational Purposes Only – Not to be relied upon as financial, tax, or legal advice.  The views expressed are those of the author/presenter and all data is derived from sources believed to be reliable.