Factors That Could Affect Your Retirement Strategy

"Will I outlive my retirement money?" This is one of the top fears for people who are starting to prepare for their retirement years. Determining how much money you need in retirement shouldn't be a number that you pull out of thin air. It's a process that should include looking at your current financial situation and developing an approach based on your goals, time horizon, and risk tolerance. The process should take into consideration all your potential sources of retirement income and project what your income could look like each year in retirement.

The process should also consider possible factors that could affect your retirement. We all have our "blue sky" visions of the way retirement should be, yet our futures may unfold in ways we do not predict. So, as you think about your "second act," you may want to consider some life and financial factors that can suddenly arise.

Retirement as an Extension of the Present

This is only natural, as we all live in the present, but the future will arrive, and the future will be different than the present. The expenses you have now may not exist in retirement, and you may have new expenses in retirement that you don't experience now. The costs you have to shoulder later in retirement may exceed those at the start of retirement, especially when it comes to medical expenses and potential long-term care. As you may be retired for 20 or 30 years, or even more, it is wise to take a long-term view of things.

You May Have a Health Insurance Gap

Medicare isn't available until you turn 65. If you retire before age 65, what do you do about health coverage? You may shoulder 100% of the cost. Suppose you become disabled or seriously ill, and working is out of the question. How will you cover those medical and other expenses and make ends meet?

Age May Catch Up to You Sooner Rather Than Later

You may stay fit, active, and mentally sharp for decades to come, but if you become mentally or physically infirm, you need to find people you can trust to manage your finances. The medical expenses can be high, as could the cost of a caretaker if one is needed. And if you're unable to make decisions for yourself, who will make those decisions for you?

You Could Be Alone One Day

As anyone who has ever lived alone realizes, a single person does not simply live on 50% of a couple's income. Keeping up a house or even a condo can be tough when you are elderly. Driving can also be a concern. If your spouse or partner is absent, will someone be available to help you in the future?

Blind Spots Can Surprise Us in Retirement

Unexpected issues and events that are always a possibility, but not front-of-mind, may quickly affect our money and quality of life. If you age with an awareness of them, you will be able to manage the outcome better.

Timing Social Security

As Social Security benefits rise about 8% for every year you delay receiving them until age 70, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security's Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Important factor when determining the optimal age to begin Social Security benefits include your life expectancy, other income you may be receiving, and your expenses.

Managing Medical Bills

Medicare will not pay for everything. Unless there's a change in how the program works, you may have a number of out-of-pocket costs, including dental and vision care. Options for covering these extra medical expenses including paying for them with money and investments or purchasing MediGap or Medicare Advantage coverage.

Underestimating Longevity

With advances in medicine, people can and do live longer than in the past. Actuaries at the Social Security Administration project that around a third of today's 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.

Withdrawing Strategies

You may have heard of the "4% rule," a guideline stating that you should take out only about 4% of your retirement savings annually in order to ensure you have enough assets to last through retirement. Recently, some experts have stated that number is now more like 3% or 3.5%. Whatever the right number is, some retirees try to abide by it, but others withdraw 7% or 8% per year. Why is this? In the first phase of retirement, people tend to live it up. You may have heard of the "go-go years" in early retirement. More free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.

Talking About Taxes

It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to specific expenses, which means the taxable or tax-advantaged account that is most appropriate as you pursue a better after-tax return for your entire portfolio.

Retiring with Debts

Some find it harder to preserve (or accumulate) wealth when you are handing portions of it to creditors. Many people have 30-year mortgages, but there are also mortgages available for 40 years and even 50 years. It's important to plan ahead properly to know if you'll have debt in retirement, how much debt you'll have, or if there is a way to retire debt-free.

Putting College Costs Before Retirement Costs

There is no financial aid program for retirement. There are no special retirement loans. Committing to pay for children's college education could make a significant impact on assets you'll have available at retirement. Parents do want to help their children pay for college, and that's great! However, it's important to consider the retirement impact and the various other options that are available, including grants and scholarships, as well as the possibility of your children paying for their own college education since they have their whole financial lives ahead of them.

Retiring with No Investment Strategy

Expect that retirement will have a few surprises; the absence of a strategy can leave you without guidance when those surprises happen.

These were just some of the important factors that can have a significant influence on the quality of retirement. Not paying attention to these factors and more would be a mistake. To help you avoid those mistakes, take some time to review and refine your retirement strategy. If you don't know where to begin, Escient Financial has comprehensive financial planning for just that.