When planning for retirement, there are several rules of thumb to guide you part of the way there, but many of these rules don’t account for all the contingencies we may face in real life.

Life Expectancy 

Average life expectancy in the US is around 76-78 years old. Life expectancy can vary based on various factors, such as income, but it’s important to note that longevity can be influenced by a complex interplay of genetics, lifestyle, and access to advanced healthcare. 

Wealthier individuals may generally have better healthcare and healthier lifestyles, which can contribute to longer life expectancies. Most of us think we might be lucky to make it to our 80s, but some of us will live well into our 90s or longer. If you have a partner, there is a higher probability that one of you is going to live longer, so funds need to be sufficient to cover those extra years. This is especially important when a spouse has a pension with no survivor benefit. 

Inflation 

Planning for the future can be significantly impacted by inflation. If you are living on fixed incomes, such as pensions, Social Security, or retirement savings, you may be especially vulnerable. As prices for goods and services increase, it becomes more challenging to afford the same standard of living.

Even with substantial savings, if those savings don’t keep pace with inflation, nest eggs don’t go as far as projected during retirement years. Fixed sources of income, such as pensions or annuities, do not always adjust for actual inflation. Although inflation has averaged around 3% and has been lower than average in the past decade, we have recently seen prices jump quite significantly. If this happens during the first couple years of retirement, you may find yourself underestimating your needs. That $50,000 car you were planning to purchase every 7 years during retirement may now be over $60,000.

Sequence of Returns

The 4% rule of thumb for withdrawal rate doesn’t come evenly. Taking a hit early on in retirement may have a larger negative impact than if a decline happens later on in the plan. Taking a loss at retirement reduces assets while you are withdrawing funds to live on. You will need some significant tailwind return to catch back up. For example, if you have $2M at retirement and lose 50%, you need a 100% return to get you back where you started. If you are withdrawing funds at the same time, you have fewer assets in the portfolio to grow. Taking large risks can cost a future standard of living, so mitigating losses is more important than trying to hit the ball out of the ballpark.

Taxes

The tax impact can depend on specific financial circumstances and the tax laws in various states. Many retirees choose to move to states with lower taxes.

Depending on income, you may need to pay federal and, in some cases, state income taxes on a portion of your Social Security benefits. However, everyone is not always subject to these taxes, and the rules can be complex.

Homes may be subject to property taxes, which can vary by location. Rising property taxes can take a chunk out of fixed incomes, especially if you live in areas with rapidly increasing property values.

How and when withdrawals are made from retirement accounts can impact overall tax liability. You may consider rollovers or conversions of retirement accounts (e.g., converting a traditional IRA to a Roth IRA). If you have a large IRA, you will be naturally pushed into a higher tax bracket as you get older and have to take larger required distributions. Converting IRA assets in low tax years can reduce the IRA balance—hence the distributions, which can prevent you from creeping up into a higher Medicare bracket. These decisions can have tax implications and should be carefully evaluated.

Medical and LTC Expenses

Healthcare costs tend to rise faster than the general rate of inflation, which means you may see a larger portion of your income going toward medical expenses as you age. 

While Medicare provides health coverage for retirees, it doesn’t cover all healthcare expenses. Retirees often pay premiums for Medicare Part B (medical services) and Part D (prescription drugs), as well as copayments and deductibles. These costs can add up significantly. Since Medicare eligibility starts at age 65, those who retire before that age may need to find alternative health insurance options, potentially leading to higher costs.

Many retirees may also require long-term care services, such as nursing homes or assisted living facilities, which are often not fully covered by Medicare. These costs can be substantial and can quickly deplete retirement savings if they are not planned for.

Whatever your case may be, taking these factors into account as you plan for retirement will help build your financial future and give you the peace during retirement that you worked so hard for.