By The Welch Group
The years approaching retirement and the first couple of years away from work are the most critical phases of your golden years. Not only must you figure out what you will do with all your free time, but also change your mindset from being a diligent saver to a smart spender. You spent so much time calculating and strategizing that you’d think you could finally sit back and relax, but it’s important to continue making sound financial decisions to make the most of your hard-earned money.
Retirement comes with its own set of obstacles, and we’ve found that most retirees make the same 5 financial planning mistakes within the first couple of years of retirement. Today let’s go over these mistakes so you’re prepared and confident to face them head-on.
1. Not Creating a Withdrawal Strategy
How do you turn your hard-earned savings into an income stream to replace the income you will lose from not having a steady paycheck? While there’s no easy answer, how you take your money out is just as important as how you put it in. The right decision for you will include tax planning, reviewing your tax return, and, most importantly, distribution optimization. That’s why you should capitalize on your wealth by determining a tax-efficient way to withdraw funds in your golden years.
Different financial accounts are taxed in different ways 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 Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free.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.
Calculating when might be 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 when you’re trying to make your money last. Create a withdrawal strategy with the help of a trusted professional who can assist you in withdrawing funds at a sustainable rate and help ensure you’re doing it in a tax-efficient way.
2. Throwing the Budget Away
Many people spend their retirement years doing everything 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 during 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. 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 can lead to inflation risk.
The long-term average inflation rate for healthcare expenditures is 4.54%, (1) and the current average inflation rate is a whopping 9.1%. (2) This means retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs.
A 2022 Retirement Risk Readiness Study from Allianz insurance company found that 43% of participants were worried about the rising costs of healthcare, 41% were worried about rising costs of living, and 47% were worried that market downturns would affect their savings. (3)
With a retirement that could easily last 20 to 30 years, inflation is a significant threat to your nest egg. Sit down with a trusted professional who can evaluate this risk and help you strike a balance between principal protection and growth.
4. Neglecting to Create an Emergency Fund
Could you comfortably pay for 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 retirees have at least 3 to 6 months of expenses in an easily accessible savings account, (4) but with the havoc these past two years have wreaked on many peoples’ finances, 12 to 18 months might be a better goal. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and can provide stability during economic downturns. This means you can optimize your portfolio to help beat inflation, as suggested above while having a safety net to fall back on.
There are other factors that should be considered in determining how much of an emergency fund to maintain, including pensions, other guaranteed income streams, and your required minimum distributions (RMDs). Working with a professional can help you determine how much of an emergency fund to maintain given your specific situation.
5. Planning on Your Own
Have you been DIY-ing your personal finances up until now? Even if that’s worked for you in the past, the consequences of a mistake are magnified in retirement. If you turn to a doctor for health concerns and a mechanic for car trouble, why wouldn’t you enlist the help of an experienced financial professional to help you pursue your vision of retirement? Having a trusted financial advisor by your side can be the difference between running out of money prematurely and having a retirement fund that lasts a lifetime.
Our team at The Welch Group would love to be the qualified professionals you turn to for help tackling these issues (and others) on the road to a confident and fulfilling retirement. Through a long-term relationship and a sound process, we can help you retire with confidence. Schedule an introductory phone call by reaching out to us at 205-879-5001 to learn if we are the right fit for your financial goals.
About The Welch Group
The Welch Group is a fee-only, employee-owned wealth management firm committed to enriching the lives of its clients. Founded in 1984, The Welch Group helped pioneer the fee-only financial planning and investment management movement and has continued to put the needs of clients first ever since. Offering wealth management and family office services to retirees and young professionals, The Welch Group team strives to simplify financial management and help clients secure their financial future so they can focus on what matters most. Our personalized and comprehensive approach helps clients plan for their goals, needs, and concerns, including estate planning, cash flow, charitable and tax planning, and retirement strategies.
As financial advocates, the financial advising team is made up of educated, experienced, and dedicated professionals, including Certified Public Accountants, a Juris Doctorate (JD), individuals with MBA degrees, and CERTIFIED FINANCIAL PLANNER™, Accredited Estate Planner®, and Chartered Financial Analyst® professionals. The Welch Group is passionate about giving back and creating positive ripple effects in our community by supporting local charitable organizations through The Welch Group Foundation. To learn more about what we do and how we can help, explore our website and schedule a complimentary consultation.
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