5 big money risks in retirement you should know and prepare for now

Should you do this before you retire?PennyGem’s Elizabeth Keatinge debunks some common myths about retirement.Buzz60, Buzz60Planning for retirement can be tricky. It requires sacrifice in terms of saving money over many years, shrewdness in investing it and discipline in withdrawing it cautiously.In addition, you must deal with uncertainties such as how long you might live, future inflation rates and how much you could incur in medical expenses.No wonder many people fail to minimize the following five key risks of retirement. From withdrawing too much early in retirement to underestimating health costs and failing to plan for taxes, there are a lot of potential pitfalls. And don’t forget about inflation and planning a buffer in case you live to be 115. ►Stock alert: Consider buying these 3 stocks in retirement►Social Security isn’t fixed income: Here are 5 ways to boost your retirement benefitHere are the biggest risks to be aware of:1. Withdrawing big early in retirementThere’s a natural tendency to want to spend liberally early in retirement, when your health is better and your interests and hobbies more varied. But taking a large withdrawal from stock-focused investment accounts can be hazardous if the market plunges soon thereafter.”You have less time to make a comeback, especially when you are starting to withdraw from those accounts,” said Jim Braun, president of Tri-State Retirement in a commentary.Visualize the damage wrought in a tough year like 2008, when large stocks tumbled 37% on average. To recover from a plunge of that size, your portfolio would need to rebound by 60%. If you also had withdrawn, say, another 10% to splurge on vacations or a new car, it would have been harder to make up the lost ground.One way to lessen this risk would be to start with a relatively low withdrawal rate and increase it gradually over time. Another option would be to shift into more conservative assets, though few retirees have all of their assets in the stock market anyway.A 4% annual withdrawal rate is a common suggestion to maintain a portfolio’s size without depleting it too quickly.”It is grounded in academic research, but it is not foolproof,” noted Jack Brennan, the former CEO of Vanguard, in his new book written with John Woerth, “More Straight Talk on Investing.” He suggests starting with a 3% or 3.5% withdrawal rate to minimize the risk of depleting your account too quickly.2. Not recognizing the inflation riskGeneral price levels have risen only modestly over the past four decades, but that could change. While many powerful disinflationary forces are still at play, from technological innovation to the graying demographic trend, inflation has spiked recently. Just think how much home prices, rents, gasoline prices and restaurant meals have risen lately.Medical inflation is another worry for retirees. According to Fidelity Investments, a 65-year-old, opposite-gender couple retiring this year can expect to spend $300,000 combined in health and medical expenses throughout retirement. That’s up from a $230,000 estimate 10 years ago. Fidelity’s estimate assumes individuals don’t have employer-provided medical coverage in retirement but do qualify for Medicare.Suppose you plan to take 4%, or $40,000, from a $1 million portfolio each year. “That $40,000 won’t have the same spending power in year 10 of retirement as it did in year one,” Braun said. As noted earlier, one way to offset this risk is by starting with a lower withdrawal rate and gradually increasing it. Also, try to hold some cash elsewhere so you can slow or halt withdrawals during down-market years.Bonds and other fixed-income investments form the core of many retiree portfolios, as they tend to exhibit price stability. But many of these assets could be treacherous now. If inflationary expectations become more pronounced, bond prices will drop. Granted, bonds rarely decline as much as stocks, but stocks have more capacity to recoup losses. Hence the wisdom of holding both stocks and bonds in a mixed portfolio.3. Underestimating health costsMedical expenses are an important inflationary component that retirees must heed. In addition to inflation itself, many people don’t prepare for unexpected medical outlays.For example, “At some point, you could require long-term care, which comes with a staggering price tag,” Braun said. Seven in 10 people will require such assistance at some point in their lives, though it won’t necessarily extend for years at a time. At any rate, few people prepare for this contingency, he said.Medical expenses are a wild card. “Covering health-care costs is one of the most significant, yet unpredictable, aspects of retirement planning,” said Hope Manion, a senior vice president in Fidelity’s workplace consulting unit.Health savings accounts are a great way to prepare. These accounts combine tax-free contributions, tax-sheltered investment growth and tax-free withdrawals if used to meet a broad list of medical expenses. Yet HSAs are also widely underutilized, Fidelity reported, with many people not contributing the maximum yearly dollar amount or investing their funds too cautiously.►5 novel ways to use HSAs: Invest, reimburse yourself for old expenses, more4. Outliving your assetsRising life expectancy increases the chances that you could deplete your savings sooner than expected.”If you are calculating that you just need enough money for a 10- or 20-year retirement, you could be in for a surprise,” said Braun, noting that one in five men who reach age 65 will live to 90. Among women, it’s one in three. This is another reason to retain some stock-market or other growth investments in a balanced portfolio.Laurence Kotlikoff, a Boston University economics professor, calls longevity risk a key danger and one that many individuals don’t appreciate. “People think living a long time is good news,” said Kotlikoff, co-author of “Get What’s Yours – the Secrets to Maxing Out Your Social Security Benefits.”He added: “But it can be terrible news from a financial perspective.”This explains his strong recommendation that people delay claiming Social Security for as long as possible – preferably to age 70, when benefits hit their monthly maximum. Think of those increased payments as a type of insurance against the risk that you wind up living a lot longer than expected, he said.5. Failing to plan for taxesYou have accumulated money for years if not decades in tax-sheltered 401(k) plans, Individual Retirement Accounts and the like. Why not keep it going for as long as possible? Often, that is the best strategy, especially if you need to build up your retirement cache further. But there might be reasons to withdraw gradually from these accounts before you’re required to do so.For example, you wouldn’t want to make large required minimum withdrawals from retirement accounts once you have started to claim Social Security. Too much income of various types can push you into a higher tax bracket and make some of your Social Security benefits taxable, too.There isn’t a single best strategy here as individual circumstances vary. But you should have a plan for coordinating retirement withdrawals, possible job income and Social Security benefits with an eye on minimizing the tax bite. Reach Wiles at russ.wiles@arizonarepublic.com.


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