By Henry Zupko, MBA, CFP®
Retirement is an exciting time. In this brand-new chapter, your day-to-day life will look completely different. Although there are many benefits, there are some challenges that also come along with these golden years—the biggest one being that you leave behind the stability of a steady paycheck and a consistent schedule. Let’s explore some common financial challenges many new retirees grapple with in the first 10 years, and how you can avoid them.
Not Creating a Withdrawal Strategy
Financial planning doesn’t stop once you enter retirement. Capitalize on your wealth by deciding the most tax-efficient way to withdraw funds in your golden years.
Different financial 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 Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. The growth in a taxable investment account is taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
As you can imagine, calculating the best time to pull from each account is enough to give anyone a headache. The last thing you want is to get hit with a hefty tax bill. And having multiple streams of income based on the different accounts you have helps stabilize your income if one of your accounts gets too shaky.
We advise that you create a withdrawal strategy with the help of a trusted professional who can help you develop a plan to withdraw funds at a sustainable rate and that you’re doing it in a tax-efficient manner.
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.
Ignoring Inflation
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This can do 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 or more, inflation is one of the biggest threats to your nest egg. Sit down with a trusted professional who can help you strike a balance between protection and growth.
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.
In the past, many advisors would recommend having 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 depending on your particular circumstances. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it helps to provide stability during economic downturns. This means you can optimize your portfolio to account for inflation (#3 on our list) while having a safety net to fall back on.
Going Through Retirement Alone
Think about how many years you have already spent growing your wealth. You don’t want all that hard work to be negatively impacted as you enter the next chapter of life. We strongly believe that partnering with a financial advisor is one of the best ways to keep your finances in line with your retirement goals and objectives.
At Tranquility Path Investment Advisors, our goal is to offer you our knowledge and years of experience to create a unique plan that matches your financial goals and dreams. We want you to experience a tranquil retirement journey with our client-focused approach and to feel confident your money is working for you and is shielded from any nasty surprises. If you’re ready to get started, schedule an introductory meeting online or reach us at (908) 759-6322.
About Henry
Henry Zupko is founder and president at Tranquility Path Investment Advisors, LLC, an independent Registered Investment Advisor firm dedicated to putting their clients first, always. With over 30 years of experience, Henry sets the direction of the firm, manages, and in many cases personally interacts with clients to help develop financial strategies that set them on a tranquil retirement path. He is passionate about being a trusted partner to his clients, developing long-lasting relationships so he can guide them through life’s milestones, twists, and turns. In all he does, Henry strives to make a positive impact on others and help change their lives for the better.
Henry is a CERTIFIED FINANCIAL PLANNER™ professional and holds an MBA from the University of Massachusetts and a bachelor’s degree in electrical engineering from the New Jersey Institute of Technology. Henry is a proud Eagle Scout who loves traveling the world and spoiling his grandchildren. To learn more about Henry, connect with him on LinkedIn.
