BWP Weekly Market Commentary

5 Unexpected Threats To Your Retirement Plan

There’s no doubt that there are plenty of things that could threaten your financial success. A personal tragedy could cost you everything you have, a natural disaster could destroy your home, and a recession could diminish your nest egg. While these events have the potential to wipe out your retirement savings, they are largely out of your control. The real dangers to your retirement plan are the little-known and often ignored threats that could cause you to lose what you have diligently worked for. Here are some ways you could run into retirement trouble:

1. Not Estimating Your Retirement Needs

If you’ve managed to amass a significant nest egg, you may be pretty proud of yourself. But even if you have half a million or a million dollars saved, it may not be enough. If you plan to retire in your early or mid-sixties, your retirement savings will need to carry you through 30 years or more. Not to mention, you will encounter additional expenses along the way, such as health care costs, home maintenance, and taxes.

The best way to avoid financial anxiety in retirement is to set up contingency funds to cover the unexpected and work with your financial professional to map out various retirement scenarios to see what your savings can handle. Then, find ways to maximize your savings to give yourself a cushion.

2. Neglecting To Create A Withdrawal Strategy

Just because you’ve worked hard to save for retirement and build up a nest egg doesn’t mean you can rest easy. Once you start tapping into your savings, you need to develop a strategy to withdraw your funds so they last the rest of your life, however long that may be.

Since you know that stocks have historically earned an average of 8% a year, you might assume that you can afford to withdraw 8% of the initial portfolio value (plus a little more for inflation each year). (1) But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% or less. (2) Since there is no simple, one-size-fits-all plan, you need to figure out what will work for you and your unique situation, taking various factors into account, such as time horizon, risk tolerance, asset allocation, and unexpected living expenses.

3. Putting All Your Eggs In One Basket

Diversification is one of the most talked about investment strategies for a reason: it protects your investments from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings.

Working with a professional, evaluate your portfolio’s current allocation to determine if it needs to be rebalanced or diversified. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.

4. Forgetting To Take Required Minimum Distributions

If you are 70½, you must begin taking required minimum distributions (RMDs) from your traditional IRA and employer-sponsored retirement accounts. It doesn’t matter if you need the money when you reach this age, you must still adhere to the RMD rules. What happens if you don’t follow through? The IRS will charge you an excess accumulation penalty of 50%! That can significantly harm your retirement savings amount.

As an example, if you are required to withdraw $5,000 and don’t, you will owe a whopping $2,500. That’s an unnecessary and avoidable loss. Depending on how much you have in an emergency fund, you may even be forced to use your retirement savings to pay the penalty, further damaging your future financials.

5. Premature Loss Of A Spouse

Losing your spouse is devastating, regardless of when it happens. But losing a spouse during the final years of their career can be dangerous for the surviving spouse’s financial plan. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income.

It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure that you are taken care of no matter what happens.

Create An Action Plan

Retirement planning can be complicated and stressful due to the many unpredictable factors that go along with it. However, by understanding some of the risks and common roadblocks you can experience, you can plan ahead for the unexpected and reduce the chances that your retirement plan will fail.

At Balboa Wealth Partners, our goal is to guide you to financial success and help you navigate the challenges of life. With our comprehensive planning process, we can help you prepare for life’s expected and unexpected circumstances. If you think your retirement plan needs a second look, call me today at 949-445-1465 or email me at jgilbert@balboawealth.com.

About Jeff

Jeff Gilbert is the founder and CEO of Balboa Wealth Partners, a holistic financial management firm dedicated to providing clients guidance today for tomorrow’s success. With nearly three decades of industry experience, he has worked as both an advisor and executive level manager, partnering with and serving a diverse range of clients. Specializing in serving high and ultra-high net worth families, Jeff aims to help clients achieve their short-term and long-term goals and to worry less about their finances and more on their passions in life. Based in Orange County, he works with clients throughout Southern California, as well as Arizona, Oregon, and Washington. To learn more, connect with Jeff on LinkedIn or email jgilbert@balboawealth.com.

Advisory services offered through Balboa Wealth Partners, Inc. An SEC registered Investment Adviser.  Securities offered through Chalice Capital Partners, LLC, member FINRA, SIPC. Balboa offers advisory services independent of Chalice.  Neither firm is affiliated.

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(1) http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

(2) http://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html?_r=0