5 Factors That Could Break Your Retirement Nest Egg
If you’ve already started planning for retirement by investing in an IRA or 401(k), then you have taken one big step in the right direction. But it isn’t always smooth sailing from there: After you have created a financial portfolio and have begun investing in your retirement fund, there are still several risk factors that could affect your retirement nest egg. Fortunately, you can protect your investment and minimize your risk with the proper planning.
Risk #1: Poor Planning
Poor planning is one of the biggest risks to your retirement nest egg. It is also the easiest risk to prevent. As a basic rule of thumb, the earlier that you begin planning, the better. Most people underestimate how early they need to plan for retirement in order to have adequate funds in the future.
In a recent survey by the American Savings Education Council and Matthew Greenwald & Associates, it revealed that a whopping 45% of all households in the US had less than $25,000 in assets – without taking home loans into account.1 In the same survey, 66% of all workers anticipated a comfortable retirement, even though $25,000 would only allow for living expenses for a few years without working.
Risk #2: Inflation
There are several unavoidable factors that can threaten your retirement nest egg, and inflation is a primary concern. As the prices of services and goods in the US increase, salaries also increase to stay level with inflation. For this reason, most people don’t notice the normal effects of inflation on their income and budget.
The big issue comes when you start to live off of your savings, and you don’t have an inflated income to keep you afloat. Regular inflation can dramatically eat into your retirement savings. At a basic level, inflation can account for up to 3% of your retirement fund per year. While this may seem like a small amount, in more dire economic circumstances, this number could rise to as much as 10%!
If you estimate conservatively to account for 3% annual inflation, it will still pose a serious threat to the total value of your retirement savings. A $500,000 retirement nest egg today will devalue by $15,000 in one year with 3% inflation. Meaning, a retirement fund of $500,000 will only have $300,000 of purchasing power in 13 years.
In order to stay ahead of inflation during retirement, it is critical to factor these percentages into your retirement savings. Instead of focusing on a lump retirement sum that you deem appropriate for the future, account for anywhere from 3 to 10% extra due to inflation to come out on top.
Risk #3: Market Crash
A dip in the stock market or a stock market crash can significantly affect retirement funds.Declines in the housing and stock markets in the US will deplete the value of retirement accounts across the nation, causing a number of workers to have to delay retirement. At the same time, unemployment rates often increase in these circumstances, making it difficult for older employees to find work. This forces seniors into early retirement without sufficient funds.
The key to surviving a stock market crash near retirement age is to start investing early and rebalance your portfolio every year. This will ensure that you have adequate funds in your IRA or 401(k) to withstand any fluctuations. Another way to withstand the storm is to focus on a balanced portfolio. In the stock market crash of 2007 – 2009, baby boomers were estimated to have lost roughly $1 trillion in retirement savings.2 However, these same boomers nearing retirement were able to bounce back and even fully recover if they had balanced portfolios and stayed in the market.
Risk #4: Debt
When you plan for retirement, do you envision debt in the picture? Most people planning for retirement hope to save enough money to live comfortably without debt. Unfortunately, a large majority of people today are beginning retirement with significant amounts of debt beyond standard mortgage payments.
Many retirees still find themselves faced with a sky-high mortgage payment and a substantial amount of credit card debt to boot. The situation becomes even grimmer when you consider that retirees have a lower income since they are living off of a retirement fund or pension. To get ahead, debt must be eliminated years before you reach retirement.
If you focus on eliminating debt as soon as possible, it will prevent your investments from being bogged down by outrageous credit card interest rates that will never be able to outpace what you earn in the stock market. There is very little point in investing in your retirement fund with lingering debt. In this scenario, your retirement investment might bring an 8% average yield, which would be lost immediately to the 15% interest rate paid to a credit card company each month.
If you find yourself in this situation, it is best to put off retirement until all debt is off paid in full. While this may not sound appealing, retiring with a large amount of debt is a mistake. If you are not earning an income to pay off your debt, then debt will be taking away from your retirement savings and greatly restricting your monthly cash flow.
Risk #5: Rising Healthcare Costs
One other lurking risk factor during retirement is the rising cost of healthcare. This can become even more of a problem if you are no longer covered under the benefits of the company that you were working for. Although Medicare offers some coverage, most retirees with health issues will have to pay a significant sum for their total healthcare bills out of their retirement fund.
Healthcare is becoming more and more unaffordable for all Americans. These rising healthcare costs are even more of a threat to retirees who are at risk for a number of health issues and in need of prescription medications.
If you plan to budget for healthcare during retirement, Fidelity Investments estimates that a retired couple will have to spend as much is $240,000 to cover all medical expenses out of pocket as of 2009.3 This astronomical amount takes into account all Medicare premiums, deductibles, and prescription medications, making healthcare expenses the largest cost for retirees in 2009.
To protect your health and your nest egg during retirement, it is important to start saving as early as you can and invest that money wisely. Instead of focusing on one lump sum for your retirement nest egg, calculate in the potential cost of healthcare expenses as a part of your financial planning.
Although many of the above risks appear to be unforeseen, they are easy to prevent once you are aware of the potential dangers to your retirement savings. In many cases, simply calculating to save a small percentage extra to account for inflation, healthcare, and stock market crashes is all that is necessary to live well during retirement.
Don't Put It Off, Jumpstart Your Retirement Plan Today
A comfortable retirement can only be secured with prudent planning, aggressive saving, and disciplined investing. Online research is a good start, but consider the benefits of discussing your options with a qualified financial advisor. The alternative could mean lost opportunities, higher fees, and lack of discipline. Request a free, no-obligation consultation today.Speak with an advisor over the phone about your retirement plan for FREE.