5 Unexpected Threats to Your Retirement Plan
When we think of a threat, our minds often go to the worst-case scenario. We think of a personal tragedy, a natural disaster, a recession wiping out our retirement savings, or other circumstances outside of our control. But a threat is simply something likely to cause damage. Looking at it that way, it’s clear that there are many little-known and often ignored threats that could cause you to lose what you have diligently worked for. Here are five unexpected threats to your retirement plan and tips to overcome them:
1. Not Knowing What You Need
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 healthcare 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. Increasing Health Care Costs
Many Americans are jealous of Canadians due to our universal healthcare, and rightly so. The average American couple at age 65 will require anywhere from $157,000 to $392,000 in health care costs over the course of their retirement,1 while Canadians can expect to pay over $5,000 a year for out-of-pocket medical expenses.2 We can be thankful for that, but it’s still a significant amount of money when you’re on a fixed income. And just like every other expense, we can expect to pay more for healthcare as time goes on. In the ten years between 2004 and 2014, health-care costs increased by 54%.3
Additionally, long-term care can drain your retirement savings quicker than you think. The public health care system may only cover a portion of the costs, or none at all, for a residential care facility. A stay in a private facility can cost anywhere from $850 to $6,700 a month, depending on your province, but 74% of
Canadians have no plan for how to pay for long-term care if they need it.4
When planning for retirement, make sure you factor in health care costs and create a plan for long-term care expenses, whether through insurance or contingency funds. If you plan to retire early, remember that your provincial health plan will not cover prescription drugs until you turn 65.
3. 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). But in reality, to protect against the uncertainty of the market, you may have to limit your withdrawals to 4% or less. 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.
4. 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. Consider mixing up your stocks with global exposure and alternative investments. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
5. Ignoring Your Long-Term Strategy
Have you ever taken the time to create an investment philosophy based on your goals, personality, and risk level? If you have, do you stay true to your strategy or do you let your emotions take over when the markets go wild? The reality is that markets fluctuate every day. If you try to beat the market and get swayed by the daily headlines, not only will you give yourself unnecessary stress, but acting on your emotions could damage your savings.
A 2015 Dalbar study shows how playing the market leads to underperformance. Buying high and selling low due to panic lowers your overall return and may jeopardize your nest egg. What should you focus on instead? Maintaining a long-term perspective and a disciplined approach and refusing to ride the emotional roller coaster.
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 Montage Private Wealth, we focus on customized strategies and risk analysis to set your finances up for future success, regardless of what threats you encounter along the way. If you think your retirement plan needs a second look, book an appointment now!
Carl Martel is the president and portfolio manager of Montag Private Wealth. Along with more than 15 years of capital market experience and 10 years of experience in real estate hard assets, he is a Chartered Investment Manager® and holds a Certificate in Derivatives Market Strategies from CSI Global Education, a Masters of Science from Laval University, and an MBA from l’Université du Québec à Montréal. A focused and pragmatic, results-oriented investment professional and entrepreneur, he specializes in serving the unique financial needs of high net-worth individuals and families, foundations and endowment funds, and business owners. To learn more, visit http://montagprivatewealth.com/ or connect with Carl on LinkedIn.