The Top 5 Financial Planning Challenges In The First 10 Years of Retirement

by Michael Vaughn, CFP®

If you weren’t eager to retire when 2020 began, I’m willing to bet that as 2020 nears its end, you’re more ready than ever for a stress-free retirement. But how will the recent events of a global pandemic, market volatility, and the presidential election affect your retirement? Before you pack up your office for good, it is crucial to plan ahead for this milestone. And keep in mind that it’s not just about planning to reach retirement; you also need to plan for all the years that follow. Without the security of a steady paycheck and a structured schedule, you’re venturing into an unknown world of finite resources and endless free time. Will all your years of hard work pay off?

We’ve found that most retirees face the same 5 financial planning challenges during the first 10 years of retirement. To help ensure your golden years are free of worry and regret, let’s discuss those challenges and how to overcome them.

1. Neglecting To Create A Withdrawal Strategy

You’ve saved for years, and now you need that money to live on. How you take it out is just as important as how you put it in. That’s why you should capitalize on your wealth by determining a tax-efficient way to withdraw funds in your golden years. 

While a successful retirement is earmarked by multiple income streams, be aware that different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s get taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so qualified distributions are withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different than your ordinary income tax rate.

As you can see, calculating the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill. We can help you create a  withdrawal strategy  that can make sure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.

2. Overspending In Retirement

Many people spend their retirement years doing all the things they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.

It’s easy to underestimate the amount of money you’ll spend those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy and then create a budget, tracking your money along the way so you stick to your goals. 

3. Forgetting To Factor In Inflation

Another major challenge we see new retirees face is the desire to play it safe in the stock market. This does more harm than good as it leads to inflation risk. 

The long-term average inflation rate for healthcare expenditures is 5.28%, (1) compared to the current average inflation rate of 2.3%. (2) What does this mean? Retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs. 

As tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is a significant threat to your nest egg. 

4. Not Having An Emergency Fund

Could you comfortably pay an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years. 

Most professionals recommend having at least 3 to 6 months of expenses in an easily accessible savings account. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it provides stability during economic downturns. This means you can optimize your portfolio to try and beat inflation (#3 on our list) while having a safety net to fall back on. 

5. Going Through Retirement Alone

After counting down the days, you’ve finally crossed your career finish line and have moved into the next stage of life: retirement. Now what? Well, it’s time to find out if all those years of working and saving will pay off. It took decades of strategizing to grow and protect your wealth up until reaching this milestone, so now is not the time to “wing it” and manage your money alone. Having a trusted financial advisor by your side can be the difference between having a retirement fund that dries up and having one you can’t outlive.

Retirement comes with unique financial challenges. Rather than preparing for and facing these challenges on your own, our Pinnacle Family Advisors team would be honored to help guide you on this new journey. Schedule your complimentary introductory meeting by emailing me at [email protected], calling (417) 351-2942, or using my online calendar. I look forward to hearing from you!

About Michael

Michael Vaughn is a Certified Financial Planner™ (CFP®) and Vice President at Pinnacle Financial Advisors (PFA) with 20 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® designation in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. He and his family attend Hill City Church, where he serves as an elder. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.

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(1) https://ycharts.com/indicators/us_health_care_inflation_rate

(2) https://www.usinflationcalculator.com/inflation/current-inflation-rates/