As you enter the exciting phase of retirement, you step into uncharted territory where your financial landscape undergoes significant changes. The security of a regular paycheck and predictable routine is replaced by a new reality of managing limited resources and embracing newfound freedom. It’s a complete shift from the familiar, and now it’s time to see if your years of dedication and hard work will truly pay off.
During the initial 10 years of retirement, we’ve noticed that many retirees face common financial challenges that end up impacting their stability and overall retirement experience. Curious to learn more? Read on to discover the top 5 financial planning challenges that retirees commonly face in the first decade of retirement.
1. Not Creating a Cash Flow Strategy
Financial planning doesn’t stop once you enter retirement. Capitalize on your wealth by deciding the most tax-efficient way to generate income in your golden years.
Social Security is a significant retirement asset for many Americans, and deciding when to receive benefits is one of the biggest questions our clients face. You can elect to receive benefits as early as age 62, but your benefit amount will be reduced. To receive your full benefit amount, you must delay your benefits until you reach full retirement age as determined by the IRS.[1] To receive your maximum benefit amount, you must wait until 70 years of age.
Social Security is a tax-free benefit as long as your combined income stays within certain limits. If those limits are exceeded, income tax will be charged up to 85% of your benefit amount.[2] This is a very important point to consider because other streams of retirement income can impact your tax liability if you’re not careful.
Different retirement accounts are taxed at different rates. Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from 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.
Create a cash flow strategy with the help of a trusted professional who 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. My advice? Create a spending plan. Calculate your monthly income given your withdrawal strategy (See #1) and then create a budget.
3. Ignoring 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.
While healthcare expenditures are typically affected less by inflation than other spending categories, from 2021-2022 there was a 4.0% increase in medical care services compared to the historical average inflation rate of 1.23%. What does this mean? Retirees are more likely to feel the effects of inflation due to mandatory 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 still the biggest threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between protection and growth.
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.
It used to be recommended to have 3 to 6 months of expenses saved up in an easily accessible savings account, but now more professionals are recommending at least 12 to 18 months’ worth. 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 beat inflation (#3 on our list) while having a safety net to fall back on.
5. Planning Your Strategy Alone
After years of careful planning and hard work to build and safeguard your wealth, it’s crucial not to leave your retirement to chance by attempting to manage your money alone. With the complexities and uncertainties that come with the transition of retirement, having a trusted financial advisor by your side can make all the difference.
At Matarazzo & Associates, we bring knowledge and experience to the table to help you navigate retirement challenges. We work together with you to develop a comprehensive retirement strategy tailored to your unique goals and circumstances. If you’re ready to take the next step, schedule a no-obligation introductory meeting by emailing me at daniel.staiger@raymondjames.com or calling (631) 319-6777.
About Daniel
Daniel Staiger is a partner at Matarazzo Staiger Wealth Management and Financial Advisor with Raymond James Financial Services. Matarazzo Staiger Wealth Management is an Independent Practice and our team is committed to helping families, pre-retirees, and union employees build a sense of security and confidence around their financial future. With more than 10 years of experience, Daniel is dedicated to providing trusted advice and tailored solutions that help his clients realize their financial potential. He is known for building relationships with his clients so he can better understand their values and the goals they want to pursue. As a CERTIFIED FINANCIAL PLANNER™professional and Chartered Retirement Planning Counselor™ professional, Daniel specializes in serving union employees, such as tradespeople and teachers, with well-thought-out guidance and a personal touch. When he’s not working, Daniel spends his time pursuing interests such as guitar, volleyball, golf, and cooking. He is also an active member of his church. To learn more about Daniel, connect with him on LinkedIn.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Opinions expressed in the attached article are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.
You should discuss any tax or legal matters with the appropriate professional.
[1] https://www.ssa.gov/benefits/retirement/planner/agereduction.html
[2] https://www.ssa.gov/benefits/retirement/planner/taxes.html
