Life is full of surprises, some good and some bad. And while there is always room for pleasant surprises, there is never a good time for the unpleasant ones. In fact, one of the worst times for an unexpected surprise is later in life, in retirement.
Years (lifetimes, really) are spent planning for a carefree retirement. So when something unexpected comes up or there is a realization that a critical planning step was missed, the consequences can be life-changing.
However, keeping in mind a few important tips can help reduce, or even eliminate, the likelihood of financial surprises affecting what would otherwise be a successful retirement.
Invest wisely now. Invest not only money, but time, to successfully plan for retirement. Start early and be diligent in adapting plans as needed in the years leading up to retirement. One of the worst surprises of all is discovering that there is not enough money to retire and it is not possible to leave the workforce quite yet.
[See: 7 Things That Can Derail Your Retirement Investing.]
To avoid this possibility, first make sure to get the most out of employer sponsored retirement plans and, if available, take advantage of the full employer match. And when determining an investment mix for an employer sponsored retirement plan (and other investments as well), determine risk tolerance.
However, do not get scared off by market volatility. If far enough away from retirement, realistically those wild swings that cause heartburn on certain days will actually be a non-factor over the long term. In addition, there is some truth to the axiom that risk tolerance should be higher when younger in order to potentially capitalize on gains in equity investments.
As retirement grows closer, portfolios need to be adjusted to provide the right balance of safety and risk. But be careful not to be too conservative as current low interest rates can actually be harmful to an investment portfolio since returns may be minimal or even non-existent.
Another factor to consider is to spend wisely and save during pre-retirement years. The advice to live life to the fullest, but plan for the future is spot on. With that said, there are many easy tricks to set aside money every week, month or year to save and invest.
The magic of compounding interest as well as automatically reinvesting gains creates a snowball effect to accumulate funds faster (and this approach can also provide tax benefits now and later).
But what if retirement is closing in fast and it seems too late to make up for lost time? While in some cases, working longer might be in the cards, it really is never too late to begin saving and investing for retirement. Set aside as much as possible each paycheck and realize that there might be a need for an increased risk tolerance even at an older age. No one is saying put everything in equities as there is always a need for some level of balance and security, but the reality is that greater risk is needed for the possibility of getting greater returns.
Plan for a long retirement. It feels like every recent study indicates we should plan on living longer. The 20-year retirement, which once seemed generous, is the new norm. With longer retirements comes a new set of considerations with retirement planning.
[See: 11 Steps to Make a Million With Your 401(k).]
How much money will truly be needed to attain or maintain a current or desired lifestyle? A thorough assessment of income and costs should include the rising cost of health care as well as the need to plan for inflation. The cost of living will keep rising each year so retirement income needs to also rise to keep pace. This, in turn, means the retirement account balance might need to be higher than originally anticipated.
In addition to inflation, think about the impact of Social Security as well as required minimum distributions (RMD). A longer retirement might mean that it is worthwhile to delay taking Social Security distributions. The longer one waits, the greater the level of payment.
In addition, with RMD, distributions from most retirement accounts must begin at 70½ and, while not necessarily a windfall, it is a source of income. (Keep in mind it is also taxable income so consult a tax advisor to ensure there are not any unwanted tax surprises such as being bumped unexpectedly into a higher tax bracket from the RMD.)
There are many options to consider with how to best use the RMD and strategies to put the money to work for legacy planning and other purposes.
Last, never underestimate the value of income planning. Many spend their entire lives focusing on accumulating funds for retirement, but do not bother planning for the “deaccumulation” phase. The account balance might have hit its goal, but now what?
A solid plan needs to be in place and adjusted throughout retirement to ensure daily, monthly and annual expenses are met and money is budgeted and invested properly. Products such as annuities can offer a guaranteed stream of income for life or over a set period of time, with varying degrees of growth potential via index or market investments. These products, combined with other guaranteed income, can help ensure retirement accounts are not outlived, which is the ultimate surprise no one wants.
Be flexible. Retirement planning is part science and part art. Life is an ever-changing journey and retirement plans need to be flexible and adaptable along the way.
For example, many Americans need to think about caring for elderly parents as well as their own children. These and other unexpected costs can throw off an individual’s own retirement plan. Unless the plan is revisited and revised along the way it could likely fail. Regular meetings with a financial and tax professional can help ensure everything stays on track.
[See: Warren Buffett’s 8 Favorite Stocks.]
There will always be surprises in life, but with careful planning, many of the unpleasant ones can be avoided or at least have their impact minimized. Taking a step back to ensure the right moves are made early on can help ensure that retirement lives up to its high expectations.
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Invest to Avoid Surprises in Retirement originally appeared on usnews.com
