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Five Major Surprises in Retirement


A major financial surprise during retirement may have severe consequences. Here are five that could arise during retirement, all of which should be anticipated and planned for.

A major financial surprise during retirement may have severe consequences because you won’t have the time or earnings to recover as you would have during your working life.

Here are five major surprises that could arise during retirement, all of which should be anticipated and planned for.

1. Major market decline

An aggressive portfolio might be perfectly reasonable during your working life. Yet if you left that allocation in place during retirement, a major decline in equity markets — especially early in your retirement — would significantly damage your nest egg.

Revisit your asset allocation a few years before retirement and during the transition out of work life. Make sure you have an appropriate plan in place that will allow your assets to grow, but at an acceptable level of volatility for your situation.

2. Higher than expected inflation

While recent inflation has been low, there’s no guarantee that high inflation won’t return suddenly. That’s why it’s important to continue to maintain some exposure to more aggressive investments during retirement, including equities.

Being too conservative with your investments during retirement can end up a costly mistake if inflation gets out of control.

That may seem to contradict the previous point, but while some investors are too aggressive with their retirement portfolios, others are too conservative. Retirement is not a single point in time; it’s a process that can last 20 years or more. Some of the assets in your nest egg are not for your immediate spending needs, but rather for your needs 10 or 20 years down the road. That’s why you should maintain a growth component in your portfolio to ensure your assets last throughout your retirement.

3. Major medical expenses

People approaching retirement often make lowball projections for their medical costs in retirement because they are in perfect health at age 55. But health can change quickly. You may have to tap into your savings much faster and deeper than you expected.

Medicare doesn’t cover all medical costs, and certainly not long-term care. What about long-term care insurance?

I don’t recommend it. LTC policies are usually quite costly, and many insurers are leaving the market or jacking up rates because the economics of the product just don’t work.

Good planning should incorporate especially conservative assumptions about medical costs during retirement to cushion unpleasant surprises. It’s much nicer to have unexpectedly good health and excess savings, rather than the alternative.

4. Premature death of a spouse

Going from two Social Security checks to one can represent a significant drop in income. So can the loss of a pension benefit or a cut in the survivor’s benefits.

The rules governing all these sources of income are well-defined, so it’s both possible and important to understand in advance how a premature death would affect the finances of the surviving spouse. Social Security benefit planning, acquiring life insurance, and setting up annuities are all possible solutions to mitigate this type of financial surprise.

5. A big inheritance

Though it’s a nice problem to have, even a big windfall can create issues.

If you receive a significant inheritance, you may need to think about estate taxes, at the state level if not the federal. You may also need to revisit your estate plan and work with a financial adviser or attorney to help you redraft estate planning documents and update your financial plan.

Anthony D. Criscuolo, CFP, a client service manager and portfolio manager with Palisades Hudson Financial Group’s Fort Lauderdale office, can be reached at Anthony@palisadeshudson.com.

Palisades Hudson is a fee-only financial planning firm and investment adviser with $1.2 billion under management. It offers investment management, estate planning, insurance consulting, retirement planning, cross-border planning, business valuation and appraisal, family-office and business management, tax preparation, and executive financial planning. Branch offices are in Atlanta, Ga., Fort Lauderdale, Fla., and Portland, Ore. Read the firm’s daily column on personal finance, economics and other topics at http://palisadeshudson.com/current-commentary.

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