The median retirement balance for someone in their 50s is $438,886, and that figure climbs to $536,748 for folks in their 60s, according to Empower. But healthy savings can provide a false sense of security unless you know how much income you’ll net from your portfolio. Stephen Dissette, investment advisor representative at Horter Investment Management in Trail Creek, Indiana, warned that it could be substantially less than you think.
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Whereas most people have a “hope and a prayer strategy” for retirement, Dissette said a secure retirement requires operational readiness — a term carried over from his days as a naval officer. He defined it as a written retirement plan that addresses the leaks that can deplete your portfolio.
Taxes
“One of your beneficiaries is your favorite uncle — Uncle Sam. He’s going to get an average 25% to 30%, maybe even more,” according to Dissette.
Converting your regular Individual retirement account to Roth IRA is one way to reduce taxes. Unlike Roth contributions, “everyone can do Roth conversions regardless of your income, your age, working status, employment status,” Dissette said.
Related: Can caring for aging parents help my tax bill?
Healthcare and Long-Term Care Costs
“I was shocked at how much the average American has to spend on health problems in retirement, whether it’s prescriptions or co-pays,” Dissette said. That’s true even for Medicare beneficiaries.
Long-term care (LTC) can deplete your portfolio even faster. An analysis by Milliman, an actuarial consultant for the health industry, projected LTC costs over the remaining lifetime of a 65-year-old in 2025 to be $171,000 for women and $98,000 for men.
Market Risk
Your investments are vulnerable to conditions that affect the overall market. If the market declines, your investments could lose significant value, especially if you’re too heavily invested in growth assets.
Dissette recommended a bucket approach to investing. It combines low-risk investments for healthcare and long-term care costs, and more aggressive investments for growth:
- Green bucket: “Safe money” held in a high-yield savings account, annuity or other vehicle posing no risk to your principal
- Yellow bucket: 100% liquid, lower-risk market investments, such as tactical funds
- Red bucket: Growth assets
Claiming Social Security Too Early
You can claim a reduced Social Security benefit at age 62. But Dissette said that unless you need the income or have limited longevity, claiming early is detrimental because it forces you to withdraw more from your portfolio to make up for the lower benefits, and it can subject more of your Social Security benefit to tax. Hold off until age 67, and ideally until age 70, if you can. Of course, it depends on your situation.
Longevity Risk
Retirees’ single biggest fear is running out of money before they die, according to Dissette. And for good reason.
“Once someone hits 65, on average, they’re going [to live] about 20 years,” he noted. Women live longer, on average, and those who outlive a spouse can land in a higher tax bracket when they begin filing taxes as singles — a situation Dessette called a “widow’s tax.” Good tax planning and the aforementioned bucket-based investing reduce the risk.
Lack of a Spending Plan
People who make more money tend to spend more, Dissette said. “They get nice cars, they get the big televisions, they get the big homes.”
A spending plan reduces this “lifestyle creep” by making you accountable for your spending.
“It’s not what you make. It’s what you keep,” Dissette said.
How To Prepare Your Finances for Retirement and Beyond
Dissette provided a priority list for getting your financial house in order.
- Spending plan
- Debt repayment (other than mortgage)
- Emergency fund
- Life insurance
- College and retirement planning
- Estate planning