Have you heard about "year-end planning"? What does that mean and what do you need to do before 12/31? Check out our list.
As our mid to late-retirement years (70s +) approach, it’s important to acknowledge and plan for the inherent risks that can affect our financial stability and overall well-being. While it may not be the most enjoyable topic, understanding the potential risks and taking appropriate measures can help safeguard our hard-earned investments and ensure a comfortable late retirement life.
To ensure you are aware of the top risks that investors and individuals face during the latter years of retirement, we’ll go through the risks and offer helpful advice on how to address them. There are 5 ways to respond to risk: avoid it, reduce it, transfer it, retain it or diversify the risk. How will you respond to each of these tops risks below?
1. Sudden Death: A Potential Game-Changer
Nobody likes to think about it, yet the risk of our own sudden death is a reality we must acknowledge. This risk becomes more significant as we age, and it can have a substantial impact on our financial plans, especially if we have dependents. This risk cannot be avoided but it can be reduced with a healthy diet and exercise. The risk can also be transferred by putting documents in place such as a power of attorney, will or trust, or with life insurance. These options will protect your wealth, your heirs and ensure your wishes are executed if this risk were to materialize.
2. Widowhood: From Two to One
Losing your life partner is an emotional experience no one wants to go through, but many of us will. During this period of extreme loss a widow my not be able to handle many of financial responsibilities required. Having a plan and support system for when this day comes, will alleviate additional stress put on the widow.
Beyond the emotional stress, the lose of your spouse also has several financial impacts. When a household is reduced to just one person, their income will also be reduced and taxes possibly increased. A partners pension may be reduced or eliminated all together after they pass. While social security payments can remain at the higher of the two partners, the second source of social security will be eliminated. The remaining spouse will also need to start filing taxes as “Single”, which is one of the higher tax brackets. This is sometimes referred to as the “widow tax”. You end up paying more taxes on the same or less income.
There’s also the misconception that once one partner passes, expenses will be also be reduced by half. Will some expenses may be removed, the full cost of a mortgage or other living expenses still apply. As well as possible medical bills from the deceased partner. With appropriate planning, the risk of reduced income and higher taxes can be reduced or avoided. Work with your advisor to prepare for this scenario.
3. Unexpected Policy Changes: Resilient Planning
The possibility always exists that taxes, Social Security, Medicare benefits, Medicare premiums, and other benefits will be changed. Since most current and future retirees will depend on these benefits to secure their retirement, the risk of changes in these programs is major. These are risks out of our control, but not unknown. So they can be planned for.
By creating a comprehensive financial plan you can reduce and diversify this risk. By preparing for these unexpected policy changes, you will have a plan to avoid outliving your savings or be burdened by unexpected expenses. Start by assessing your current financial situation. This includes what are your income sources and how long will each one last? Will your expenses increase or decrease later in life? How can your investments help with your plan? Develop a clear budget and consider consulting a professional financial advisor to help you outline a robust financial plan that considers different policy change scenarios.
4. Inflation & Interest: Wealth Eroders or Buffers?
Inflation is an undeniable risk that affects retirees and investors alike. With the rising cost of living, your purchasing power can gradually decrease over time, making it essential to incorporate inflation into your financial plan. Diversify this risk by investing in assets that tend to outpace inflation, such as equities or real estate, and maintain a diversified portfolio that can help you weather inflationary periods.
The growth of your retirement fund depends, in part, on the way interest rates move. While low-interest-rate environments may be great for those looking to borrow, that’s not generally what late retirees are looking to do. During a high-interest-rate environment, like right now, it is a great time to save. Ensure your financial plan takes into consideration both high and low interest rate environments. A financial advisor can help monitor this for you, and make adjustments according to your plan.
5. Aging and Decisions: Avoid Financial Mistakes
It’s worth noting that as we get older, financial decision making will become harder or not possible for some. It’s easy to become a victim of elder financial fraud or to make a financial mistake due to forgetfulness or cognitive decline. Try to complete most major financial decisions by your late 60’s or early 70’s. Simplify your life as much as possible by consolidating duplicate and unnecessary accounts. Avoid this risk by assigning a trusted partner or family member as power of attorney and/or financial power of attorney to help manage your assets and health. Also create a financial organizer so your spouse or other family members can access information if needed. List out all your accounts, websites to find them and passwords to access them. Keep this is in a secure place that others cannot access without your permission.
6. Long-Term Care: Protecting Your Health and Wealth
Increased costs in later retirement generally revolve around health care and can be a substantial burden to yourself or your loved ones. You may need to plan for home health services, a move to an assisted living facility, or other long-term care support. Know what services Medicare and your health plan do and don’t cover. You can transfer this risk with a supplemental insurance policy or plan to self-insure. By saving and budgeting for potential future medical expenses, you are reducing the healthcare cost risk. By not putting a plan in place, you are transferring this risk and burden to your loved ones.
At CAM, in our collective experience of over 55 years we have worked with our clients to proactively address the risks that investors and individuals face in their late retirement years. We recognize these are critical steps toward safeguarding your financial future. Remember, seeking advice from professionals and reviewing your financial plans regularly can help you stay on track and enjoy a comfortable retirement filled with peace of mind.
M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees.
This blog has been provided solely for informational purposes and does not represent investment advice. Nor does it provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy.
Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.