Your Retirement Defense Checklist: Can you check these 8 items off your list?

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Your Retirement Defense Checklist: Can you check these 8 items off your list?

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Check the following 8 points off your list to help ensure you’re prepared for a successful retirement. A black swan event is an unpredictable, unexpected occurrence that has widespread, major consequences.

1. What if there is a huge market drop tomorrow, like in 2008?

Plan for a 50% market drop, akin to the 2008 financial crisis, just in case. Perhaps not likely tomorrow, but this will happen again, and you need to have a plan in place that you can stick with. The general objectives are A) Don’t sell when stocks are low and B) Receive the same amount of income from your portfolio even when the market is down. Ways to prepare? Have a downside cash reserve to get you through the market drawdown.

2. What if tax rates go up on your 401k and Traditional IRAs during your retirement years?

Prepare for higher tax rates on your 401K and Traditional IRAs. This also goes for ordinary income and possibly capital gains. Currently we have some of the lowest tax rates since the introduction of the income tax. Compare that to our national debt: we have historically low tax rates and historically high national debt. What is the political class more likely to do: lower spending or raise taxes? Current tax rates are set to sunset in 2026 when they will revert to the higher pre-2017 tax rates. Ways to prepare? Lock in lower rates now.

3. What if inflation comes roaring back?

If inflation comes roaring back in the near of far term, you should be prepared. Investing in companies with pricing power can help to mitigate this. Understand your essential expenses vs your discretionary expenses. Essential expenses are things like taxes and housing, and your variable expenses are things like vacations, shopping, and gifting. You might not have an option when it comes to inflation on essential expenses, but you do have options to cut back on variable expenses. Other ways to prepare? Invest in a portfolio that offsets inflation.

4. What if healthcare costs skyrocket during your retirement years?

US Healthcare inflation has a long-term average of 5.14% per year.1 We build this into our retirement plans so that we plan for it. These expenses might be paid for by a Health Savings Account that is invested in the market. Medicare premiums and out of pocket costs might be paid for from other investments accounts or via Required Minimum Distributions. Long-Term care insurance is another potential solution. Ways to prepare: save, invest, rinse, repeat. If you are already retired? Build this inflation rate into your plan and see if your investments will cover it or if you should consider Long Term Care insurance.

5. What if Social Security benefits get cut?

How likely is it that social security will get cut? Benefits would be cut by 23 percent in 2033 if no legislation is enacted before then to shore up Social Security's finances per the U.S. Budget Watch 2024.2 Could this happen? Sure. But, you can find some reassurance in the fact that these payments have never been cut, suspended, or delayed due to a failure by Congress to pass legislation in time. Perhaps more likely is that there would be no changes for current or near-retirees, but the full retirement age would be raised to Age 70 for “younger” workers. This would mean current workers lose 2-3 years of benefits. Or the payroll tax could increase to almost 16%. Or the $160k wage cap on social security could be increased.3 Ways to prepare? This is more reason to build up your investment accounts via 401ks, Traditional IRAs, Roth IRAs, and regular accounts over time, especially for the younger to middle age folks in the wealth building phase of life.

6. What if market returns are lower than expected?

We’ve all heard the experts telling us to expect lower returns or that “we are in a low return environment”. While we shouldn’t necessarily expect them, we should plan for them just in case. Real returns, that is the nominal return minus the inflation rate, from 1802- June 2023 for stocks is 6.8%. From 1928-2022 it was 6.6%. So, if we plan for a lower return environment, perhaps we use something the in the range of 5-6%.4 Ways to prepare? We can use this lower return figure inside the Retirement Plan Analysis and see how your plan would perform. Other ways are to increase your investment accounts more, adjust your asset allocation, and manage withdrawal strategies.

7. What if you live longer than expected? You want to make sure you won’t run out of money and that you will still have income.

Did you know that life expectancy increases with age? A newborn has a life expectancy of 77.5 But for every year lived, that life expectancy increases. A 65-year-old female has an 86 year life expectancy and a 65-year-old male has an 83 year life expectancy.6 Ways to prepare: By default we plan for a 90 year life expectancy in our plans, but for many we increase that to Age 100. The bottom line, and the big picture, is that we want to make sure you do not run out of assets or investments before you die.

8. What if a company stock in your portfolio tanks, a la Enron, Lehman Brothers, GE, or Sears?  

Don’t put all your eggs in one basket. And don’t put too much into one investment. Your risk-adjusted return is an important factor to consider. Simply stated, it measures how much return an investment generates relative to the amount of risk it takes on. Ways to prepare? Invest through a diversified portfolio.

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*Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.