Planning Your Retirement Journey Step 3: Prepare for the Risks of Your Route

So far in this blog series, we’ve talked about Step 1: Choosing Your Retirement Mountain and Step 2: Mapping Your Route. Now it’s time to do a quick reality check and consider some of the potential risks that may impact you along your route.

You may encounter setbacks on either part of your journey—the ascent or descent—but there’s arguably more risk during the descent, when you’ll have less time to recover from setbacks.

With the right guidance and planning, however, you can anticipate what those risks might be and plan ways to manage them. Consider these potential risks and strategies:

1. The risk of outliving your income.

With a real chance of living to age 90 (the odds are nearly one out of three for a 65-year-old woman; one in five for a man*), you want your retirement funds to last as long as you do. Will Social Security, a pension, and/or your investments provide enough reliable income to support the lifestyle you want? If not, you might think about getting a part-time job or starting a business. Or consider converting a portion of your savings into a monthly stream of income from an annuity.

2. The risk of spending too much, too quickly.

Your spending habits and expenses may depend on your retirement archetype. For example, an Artist could have modest spending needs, while an Adventurer’s travel plans may call for substantially more funds. If your estimated retirement spending exceeds the income you expect to have, you may need to consider living more frugally so you don’t deplete your savings too fast. 

3. The risk of too much debt consuming your income.

Repaying a mortgage or steep credit card bills in retirement will leave less money for other needs, so it could make sense to pay off as much long-term debt as possible before retiring. If you’ve already started down the mountain, check with trusted lenders to see about refinancing your debt at a lower interest rate.

4. The risk of caring for dependents.

Will an aging parent need help? How would you handle an adult child’s move back home? These situations tend to arise unexpectedly and can impact you financially. As you plan ahead for your future retirement income needs, keep the needs of others in mind as well if you’d like to be able to help them out.

5. The risk of debilitating (and expensive) health issues.

We all know the guidelines: eat sensibly, exercise, don’t smoke, and listen to your doctor. Still, stuff happens. Good health care coverage can help protect your retirement income from steep medical bills. It’s worth considering long-term care insurance, too. (Some cost-effective policies allow two spouses to share coverage.)

6. The risk of not understanding how taxes can affect your retirement income.

When you start taking funds from your Traditional IRA or 401(k), the income tax associated with the income you’ve deferred will be due. To lessen this hit when you’re retired, you may want to consider paying the deferred tax while you’re still working. How? Ask the financial institution holding your IRA about converting the balance into a Roth IRA. If your employer offers a Roth 401(k), you may be able to convert a taxable 401(k) account the same way. After that, withdrawals will be tax-free (as long as you meet certain requirements). For detailed advice about managing your money more tax-efficiently, consult a knowledgeable CPA, tax professional or certified financial planner.

Many of these risks are based on external factors that you may have little control over. But some of them stem from internal factors that you can influence: your own knowledge, beliefs and behaviors related to managing your personal finances. So in my next post, I want to focus on you, the climber. We’ll look at how you think and act around money, and how that may affect the retirement you envision.

Your Retirement Reality Sherpa