The Top 5 Retirement Income Planning Challenges

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Jul 9, 2020


By Lee Sherbakoff, CPA/PFS, CFP®, RICP®

You’ve spent decades accumulating assets and saving for retirement. But socking money away is only half the battle. Here are the top 5 financial planning challenges you face in retirement—and how you can plan for them today.

1. Feeling Depressed In Retirement

Many seniors fail to plan for the psychological transition that occurs when you head into retirement. Studies show that your likelihood of getting clinical depression goes up by 40% after retiring. (1) And if you think about it, it makes sense. When you retire, you say goodbye to everything you’ve known for the past 30+ years: your career, your colleagues, and your daily routine. 

To set yourself up for a happy retirement, redirect your time and focus into something fulfilling, such as: 

  • Starting a second career through a passion project, part-time job, or contract gig
  • Volunteering your time at the organizations and causes you care about 
  • Finding a community of people you can meet with on a regular basis
  • Pursuing your passions in retirement—no matter how big or small

2. Accounting For Longevity

In a perfect world, you’d know exactly when you were going to die and we’d build the perfect plan that ensures your money lasts just as long as you want it to. But the reality is, determining an appropriate planning horizon is a bit of an art and a science. If you die sooner than your planning horizon, you could have spent more money in retirement than you did. If you die after your planning horizon, and you could run out of money altogether.

With life expectancies constantly increasing, it’s not uncommon for people to have a retirement that spans 30 years—just as long as your career. (2) That’s why it’s important to plan for longevity, so you can make sure your money lasts as long as you do. 

We recommend looking at your family’s medical history as well as life expectancy tables to get an idea of how long you may live. Once you have an estimate, add on an extra 5 to 10 years to account for unexpected medical and long-term care costs. 

3. Estimating Inflation

When you consider the fact that your retirement could last 20 to 30 years, inflation becomes a major threat to your nest egg. For example, if you live off of $3,000 a month in 2020, then you’ll need around $7,282 to maintain that same standard of living in 2050 (assuming a 3% inflation rate). (3)

While we can’t predict inflation, historic trends show us that the average inflation rate since 1960 has been around 3.7%. (4) It’s common for new retirees to want to play it safe and move most of their money into bonds when they enter retirement. But the truth is, you need a well-balanced portfolio that protects your nest egg, while still positioning it for growth. You should consider working with a financial advisor who can help you map out different scenarios to see how far your money will last. 

4. Deciding When To Take Social Security And Pension Benefits

The average Social Security payout is around $18,036 a year. (5) And if you’re lucky enough to have pension benefits, those usually pay out between $9,000 and $23,000 a year. (6)

Deciding when to take these benefits is a delicate dance; one wrong move and it could trigger an avalanche of financial consequences. For example, you receive 100% of your Social Security benefit at full retirement age (which varies depending on your year of birth); if you take benefits as soon as you can, at age 62, you only receive 75% of the amount. But if you wait until age 70, you get 132% (your full amount, plus a bonus). (7)

The same goes for pensions. Choosing between taking a lump sum or annuitizing could add thousands more dollars to your retirement income. But it can be hard to tell which choice is right for you. Social Security and pension benefits are complicated. Don’t hesitate to reach out to a trusted financial advisor who can help you examine your options and choose an execution strategy that keeps more money in your pocket. 

5. Forecasting The Markets And The Economy

It’s impossible to predict how current federal monetary and fiscal policies will affect inflation, taxes, healthcare, and all other governmental services down the road. Still, we must plan for these challenges.  

What would happen if you retired on the brink of a recession, similar to the one we’re facing now? Do you have enough money in savings to cover one or two years of expenses if the stock market crashes right as you’re getting ready to pull from investments?

A comprehensive financial plan accounts for all of these what-ifs, so you’re not caught off guard if they happen to you.

Your First Step

As you can see, planning for a successful retirement has its challenges. If you’re nearing retirement or newly retired, you don’t have to face these challenges alone. At Nalls Sherbakoff, we’d like to help you create a customized plan that covers all of these unknowns and helps you transition into a happy and fulfilling retirement. Set up a complimentary appointment so we can see if our services are the right fit for you by calling us at (865) 691-0898 or contacting us online.

About Lee

Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), and Retirement Income Certified Professional (RICP®) credentials. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). When he’s not loyally serving his clients, Lee enjoys giving back to the community and to his profession, acting as a council member of the Tennessee Society of CPAs and a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.

DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.

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(1) https://iea.org.uk/in-the-media/press-release/retirement-causes-a-major-decline-in-physical-and-mental-health-new-resea

(2) https://www.cdc.gov/nchs/data/hus/2017/015.pdf

(3) https://smartasset.com/investing/inflation-calculator#RT4uZSIEjk

(4) https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

(5) https://www.fool.com/retirement/2020/01/03/this-is-the-average-social-security-benefit-in-202.aspx#:~:text=In%202020%2C%20the%20average%20monthly,IMAGE%20SOURCE%3A%20GETTY%20IMAGES

(6) https://www.newretirement.com/retirement/average-retirement-income-2018-how-do-you-compare/

(7) https://www.ssa.gov/benefits/retirement/planner/1943-delay.html