Why Smart Retirees Still Run Out of Money in Retirement, According to Kevin Lum
Even careful planning doesn’t guarantee a secure retirement.
According to certified financial planner Kevin Lum, some retirees face unexpected expenses they didn’t plan for. Check out these five things that could impact a good retirement plan.
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The Sequence of Returns Risk
Lum pointed out what many people don’t understand. This risk is not about average investment returns, but when losses happen and money has to be spent.
Many people nearing retirement are unaware that sequence of returns risk (SORR) can cut into their retirement income more than expected, according to Charles Schwab. Here are a few ways to be prepared for a major drop in portfolio value early on in retirement, per Charles Schwab.
Keeping cash investments (a year’s worth of expenses after accounting for other sources of income, including Social Security)
Having high-quality short-term bonds or bond funds (two to four years' worth of expenses)
Scaling back on spending and portfolio withdrawals (if you don’t have investments or bonds)
Spending Shocks
If a retiree spends $100,000 a year, they can also expect to spend at least $10,000 on unplanned expenses, Lum said.
Having an emergency fund in retirement can be a cushion for unexpected expenses, like major household repairs, a family emergency or a healthcare expense. Most financial planners recommend three to six months' worth of living expenses for an emergency fund, according to AARP. Kristen Beckstead, certified financial planner (CFP) and vice president at First Horizon Advisors, told AARP that retirees should have 18 to 24 months of living expenses in their emergency fund.
Tax Drag
Lum stressed that retirees may not realize that if most of their savings are in an IRA or a traditional 401(k), any money withdrawn will be taxed as ordinary income.
Also, each withdrawal retirees make can impact tax brackets, Medicare premiums, future required distributions and Social Security taxes, per Landsberg Bennett. The best strategy for retirees is to develop a tax-smart withdrawal plan with a financial advisor to manage those impacts.
Inflation’s Slow Burn
Inflation is described by Lum as a “silent risk” to the retiree’s portfolio. He recommended equities as a protection against inflation over time, finding a balance in each retiree's portfolio and a plan that allows for rising costs.
Ultimately, the right equity choice for investors should be based on cost sensitivity, risk tolerance and the level of exposure they want given today’s higher inflation, according to ETF Db.
The Psychology of Spending
Lum challenged viewers to ask themselves if they are making decisions out of fear or out of planning. He said that time is running out, and many retirees put off spending because they are afraid.
Because income is no longer guaranteed and saving has become a habit, it may be difficult for retirees to decide to spend money. To help retirees spend with confidence, they should plan how much money they can spend and what it can be spent on.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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