I'm a Financial Planning Pro: This Is How You Can Stop These 5 Risks From Wrecking Your Retirement

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A successful career often includes risk-taking to master greater responsibilities, earn more income and substantially increase your savings for retirement.

But when you've reached the finish line of your working life, even if you've done a great job of putting money away, the risks aren't necessarily over.

Inflation, market volatility and health care costs are among the factors that can eat away at your nest egg, especially if you haven't planned how to combat them well before retiring.

Most people are aware of those risks: An Allianz Life study found that 64% of Americans worry more about running out of money than they do about dying. However, more than half do not have a plan in place for their retirement, according to another Allianz Life study.

Many have a clear idea about their retirement goals in terms of things like savings, vacations, family time, hobbies, charity and gift-giving. But failing to plan proactively to protect against risks could sabotage those goals. Let's take a look at some of the main retirement risks and how you can best prepare for them.

1. Income risks

Income is generally the top concern among pre-retirees and retirees. Therefore, it makes sense to start with a written income plan.

A retirement income strategy is a structured process that shifts your focus from accumulating savings to generating sustainable, long-term income.

Determine your retirement lifestyle. Visualize what you want retirement to look like. Your goals will significantly influence the amount of money you'll need.

Estimate your future expenses. Create a retirement budget that includes essential expenses (housing, monthly bills, health care, food, etc.) and discretionary costs (travel, entertainment, hobbies).

A common rule of thumb is to plan to replace 70% to 80% of your pre-retirement income to maintain your lifestyle, but this can vary widely.

Identify and evaluate your income sources. This includes Social Security, pensions, retirement accounts, annuities, rental income and stocks.

Build a smart withdrawal strategy. Plan how to withdraw from savings to ensure your money lasts. Common strategies include the "4% rule" (withdrawing 4% initially and adjusting for inflation each year afterward), the bucket strategy (dividing assets into time-based buckets) and dynamic withdrawals (adjusting withdrawal rates based on market performance).

A bucket approach can help you manage cash flow. Funds for immediate needs can go into a low-risk, liquid account, and longer-term funds can remain invested for growth.

Keep in mind that retirees can often spend far more than 4% of their retirement assets annually, especially in the early years of retirement when more income is needed.

That's because retirees are more likely to be healthier early on in retirement, enabling them to travel and be more active than when they reach their 80s.

2. Investment risks

Along with an income plan, it's important to have a comprehensive investment review to determine how much risk is enough risk.

Managing these risks requires a strategic shift from the aggressive growth strategies used during the accumulation phase of your working years.

Here are some ways to evaluate and balance your investment risks in retirement:

Diversify your investments. Does your current portfolio match your risk tolerance? How would your assets be impacted by a market crash? Diversifying with the right mix of stocks, bonds and other assets can help manage market volatility and inflation risks.

Balance risk and growth. As you near retirement, you may want to shift some of your portfolio to more conservative investments to help protect your capital.

But you'll also need some exposure to growth-oriented assets to combat inflation, including income-producing investments such as bond ladders, dividend-paying stocks and real estate investment trusts.

Cash, certificates of deposit (CDs) and other low-growth investments are particularly vulnerable to inflation.

Annuities can create a reliable stream of income that reduces the need to sell assets during market downturns.

Be aware of and mitigate sequence of returns risk. This is one of the most damaging risks for retirees and refers to the impact of the timing of investment gains and losses, especially early in retirement.

It's the danger that poor investment returns can have a devastating and lasting impact on a portfolio, even if average returns are good over the long term. This risk is due to retirees withdrawing money when the market is down, which locks in losses, leaves less capital for future gains and increases the chance of outliving savings.

Ways to mitigate sequence of returns risk include creating a cash reserve, implementing a bucket strategy and diversifying your portfolio.

Plan withdrawals carefully. Consider using a percentage-based withdrawal strategy rather than a fixed dollar amount. This approach can help limit withdrawals during a market downturn and preserve your capital.

3. Tax risks

Strategic tax planning can help preserve your savings. To organize the process and mitigate your taxes year to year, you can break those taxes down into three buckets.

That way, you can strategically choose which accounts to withdraw from each year to control your taxable income, possibly keeping you in a lower tax bracket.

Taxable income. This bucket includes any non-retirement investment accounts funded with after-tax dollars — standard brokerage accounts, savings accounts, CDs and bonds.

Each year, you will be taxed on any interest, dividends and capital gains that your investments earn. Long-term capital gains are often taxed at a lower rate than ordinary income.

You can draw from your taxable accounts first in retirement to allow your tax-deferred and tax-free accounts to continue growing.

Tax-deferred. Pretax retirement accounts are an effective way to build savings during your working life, but they are taxed as regular income when you withdraw that money in retirement.

Additionally, they must eventually be withdrawn, even if you don't need the money, and are subject to required minimum distributions (RMDs), which begin at age 73 for most people.

Those accounts include traditional 401(k)s and IRAs, SEP IRAs, SIMPLE IRAs, 403(b)s and governmental 457(b) plans.

These distributions will raise your taxable income, perhaps result in more of your Social Security being taxed in the process and also potentially increase your Medicare premiums.

Tax-free. This bucket has a Roth IRA or a Roth 401(k). Because of the RMDs, continuing to defer taxes throughout your career typically isn't the best strategy — all you're doing as your balance increases is upping your retirement taxes and possibly putting yourself in a higher tax bracket.

That's why converting some or most of those tax-deferred accounts to a Roth IRA or Roth 401(k) can make sense. Those accounts are not subject to RMDs.

And though you pay income tax on the amount you transfer in a given year, withdrawals are tax-free if you're at least age 59½ and have had the account for at least five years.

4. Health risks

The question to ask yourself regarding health risk is: "Can I cover the future costs associated with health care and long-term care (LTC)?"

Some people procrastinate or pretend that ill health won't affect them. But without a plan in place, you risk losing much of your savings, which also means less for your heirs.

You certainly don't want to put a burden on your children or leave your spouse in a difficult financial situation. Since Medicare does not cover all health care expenses or most LTC, proactive planning is essential.

Here are some ways to address health risks in retirement:

• LTC insurance. Premiums are generally lower if you purchase long-term care insurance when you are younger and healthier, typically in your 50s. Hybrid policies combine life insurance or an annuity with an LTC benefit. If you need LTC, you can use a portion of the death benefit. If you never use it, your beneficiaries receive a death benefit.
• Health savings account. HSA contributions are tax-deductible, investments grow tax-free, and qualified withdrawals are free. You can use HSA funds tax-free to pay for Medicare Parts B and D and Medicare Advantage premiums.
• Medigap insurance. These are private insurance policies that help cover costs not paid by Original Medicare, such as copayments and deductibles. You must have Original Medicare Parts A and B to purchase a Medigap policy.

5. Legacy risks

Building an estate or legacy plan involves more than just drafting a will; it's a comprehensive process to ensure your assets, wishes and values are protected and passed on.

Here are some key elements and considerations of an estate plan:

Create a comprehensive list, and gather relevant documents. Catalog all of your assets, including your accounts, real estate, investments, pension plans, life insurance policies, vehicles and personal belongings.

Document all debts to prevent financial burdens on your beneficiaries.

Maximize tax efficiency. A financial adviser can help you incorporate strategies such as charitable giving or using trusts to minimize estate taxes and preserve more of your wealth for your beneficiaries.

Converting a traditional IRA to a Roth IRA creates a tax-free inheritance for your heirs. A life insurance policy can provide a tax-free payout to your beneficiaries, and placing the policy inside an irrevocable life insurance trust can ensure the proceeds are excluded from your taxable estate.

Consider lifetime gifting. You can transfer wealth to your heirs during your lifetime by taking advantage of annual gift tax exclusions.

For 2025, you can gift up to $19,000 per person tax-free without it counting against your lifetime exemption.

Not all risks can be eliminated, but they can be greatly reduced if you engage in proactive and detailed planning — ideally, well before you retire.

You've earned the right to enjoy your retirement, so consult your financial planner to help confront the risks in advance and create more financial certainty for the long term.

Dan Dunkin contributed to this article.

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