9 Critical Risks That Could Derail Your Retirement—Are You Prepared?

Peter, very good to see you.

Welcome back everyone. Today we are talking through the nine critical risks that you need to plan for. So Peter, again, you have great resources on your website. We're kind of doing a countdown theme. We are on number nine, which is about retirement planning, but also it's the risks, right? It's not just about saving enough. It's about preparing for the risks that could derail your financial future. So today we're going to break down the top nine risks that need to be a part of your plan.

I'm really enjoying this countdown. So number nine for us is sequence risk. I feel like this is something we hear about a lot, Peter, but we don't necessarily understand. Yeah, and some people have heard of this. Like some of these risks, I think everyone probably knows, and then some of them are lesser known.

Some of them are sort of not even talked about. I think sequence risk is one of those ones that's lesser known, but basically it is the order in which returns might happen. And I've seen illustrations of this that are fantastic and they basically show that if no contributions and no withdrawals are made, it does not matter what order the returns happen in. If you've got like a 20 year period, you can shuffle those returns in any order you like, and the ending balance is always going to be the same. But the moment that you start adding money or importantly for retirement, taking money out, making withdrawals, if those returns happen in a way where the negative returns occur first, then it impacts your entire trajectory. It changes the outlook for what retirement looks like.

So, you know, no problem. I'll just retire into a year where I know the next several years are going to be up years in the market, says everyone, right? Unfortunately, we don't have that crystal ball. We don't have that ability and that foresight and knowledge and market downturns can happen basically at any time. So what we want to do is be cognizant of this sequence of returns risk and have strategies specifically in place to account for the fact and remove just the sheer luck of timing into an opportune market or the bad luck of timing retirement into a downward or bear market or recession. Like if that happens, we've got to have a plan for how to make it through that period. Right.

All right. The next risk is legislative risk. What do you mean by this? This is that Congress meets and when they meet, they can change the rules on things. So back in 2019, they changed the rules on retirement accounts. They implemented the Secure Act, which basically did away with generational tax deferral from those IRA dollars that ended the stretch IRA. And then they implemented Secure Act 2.0, which even further impacted certain aspects of retirement accounts. Right now, we are talking about the potential for the extension or the expiration of the 2017 Tax Cuts and Jobs Act.

What does that mean for our tax rates? Bottom line is that legislative risk means that we could be withdrawing money in retirement under a different set of rules than we saved the money under. So if the rules change, that impacts our outcome and the strategies that are available. We've got to execute strategies based on the rules as we know them today. But we always have to leave ourselves room to pivot because the rules can change on us. And how do we adapt to that? We've got to execute strategies that can remove some of that uncertainty, if possible.

Yeah, that one is one of the scariest to me. All right, now let's talk through withdrawal rate risk. We've heard about the 4% rule. Is that what you're talking about?

Yeah. And a lot of people aren't aware of the 4% rule or basically the guidelines that it suggests is that most people have this expectation that they can take way more out of their portfolio than is actually suggested. So the 4% rule has been used by the financial industry for nearly 30, 35 years as the suggestion for a prudent kind of cash flow or withdrawal. And what it says is that on day one of retirement, whatever your lump sum balances, you should be able to take a 4% distribution, adjust that over the years for inflation, and hopefully not run out of money over a 30-year retirement. The problem with that is the words should be and hopefully leave some probability of doubt. And if you go to Vanguard, which is famous for do-it-yourself kind of calculators and retirement tools, and you run 30-year retirement projections on the 4% rule, the Vanguard retirement calculator gives you about a 90% probability of success, which means about a 10% probability of failure, which means running out of money following this suggested 4% rule.

Regardless, we just need to identify the tools that can generate cash flow and then gauge them for how reliable they are going to be. But if the weatherman says there's a 10% chance of rain today, I might feel okay leaving my house without my umbrella. If my financial future is based on a premise that has an accepted 10% likelihood of failure, I'm doing everything I can to examine why that is and eliminate that chance of running out. Yeah, I'd rather get rained on than lose my entire life savings. Right.

Yeah, it's not going to ruin your life if you get a little wet. But if you're on the wrong side of the probability here of that 4% rule, that really is going to impact not just you, but your family, your loved ones. We don't want to do that.

Perfect. Next, what could be one of your biggest expenses in retirement, health care costs and long term care? It's a risk and we can only do so much. And, you know, I meet with people who are taking care of themselves, who are very healthy. And unfortunately, like sometimes it's just sheer luck if we have a health care event, we can increase the odds.

We can do things that put this in our favor. But regardless, even the healthiest among us are still going to have health care expenses into and throughout retirement. I mean, Medicare premiums and deductibles and copays on average for the average like 65 year old couple.

I've read studies that just those items are several hundreds of thousands of dollars or more over the course of a retirement like multiple six figures kind of expenses. And then if we talk about the potential for long term care, which the Department of Health and Human Services states that about 70 percent of us will need before the end of our lives, that is another potentially catastrophic expense and scary graphic on the screen now projecting out about 20 years that this could be an expense of one hundred and thirty thousand to two hundred and ten thousand dollars per year, in addition to other expenses that we may have just for the potential for those health care costs. So we've got a plan for that.

And at the very least, we need to recognize that this is a significant risk and document our plan and approach for how we're going to address it. Risk number five, account for any changes in spousal income. Yes, spousal income dependency, I call it. You know, a lot of people are making decisions on Social Security and pensions when they're in their early to mid sixties and the consequences of those decisions might not be felt until the mid to late eighties when one spouse unfortunately passes away, predeceases the other.

And guess what? That surviving spouse was actually dependent on the income that disappeared with the first spouse. You know, we don't oftentimes have the foresight to think through financial decisions with a with a great deal of accuracy way, way, way into the future. But this is one where we can actually sort of see the future decades into the future and say, well, if I pass away, this is how much income is going to disappear. And Social Security, like an ideal situation where you've got two high income earners who each claim their own benefit. Well, that means as much as a 50 percent reduction in Social Security income for that surviving spouse. And so we've got to plan and prepare for spousal income dependency.

If that income is going to disappear, how are we going to make up for it? Right. That's got to be in the plan. Right. Number four, counting down market volatility. Yeah. And this is one of those risks that everyone is aware of.

Right. The market goes up and then it goes down. We've seen some down and we've seen some volatility and we are going to continue to over the next decades of the future into and throughout retirement. You've got kind of the average time span in retirement. You'll probably see several market cycles, several corrections, several bear markets, maybe even a couple of recessions.

How do you plan on getting through those periods financially without undue stress, without being worried about what you are doing financially, with remaining cool, calm, head headed, collective and confident through those times? That is why we need the plan in place before we see the volatility, not during the midst of it, reacting to it. Now, next, we have taxation, one of your favorite topics to talk about. Yeah, I do like talking about it. I like helping people to control it.

Right. It is one of our largest known expenses in retirement. There are strategies to control taxation or at least remove some some of the risk of taxes being a burdensome cost into the future. Look, we all have to pay something.

We got to pay our fair share. But the more money that you have, the more income that you have, the more costly a mistake it is to overlook proactive tax planning because you have the ability to to execute some strategies to control this expense into the future. And taxes are like a double, triple, quadruple compounding whammy if you if you ignore it, because the tax on your income can cause tax on Social Security and can cause your Medicare premiums to be higher and can cause capital gains to increase on you. So for all those reasons and the fact that right now is a seriously advantageous time to look at tax planning, you need to have a plan for this.

You have the chart on the screen showing this. We are at a historically low tax environment. In fact, taxes would need to go up about 30 percent from where they are right now just to reach the historical average. So let's let's do some tax planning while taxes are on sale.

How about that? Right. That was why 2024 saw a 40 percent increase in Roth conversions. Yeah, big time. And we've moved over millions of dollars for our clients into Roth IRAs and help them contribute even more.

This is something that we should definitely be paying attention to because there is no guarantee that that opportunity is there forever. Next we have inflation, the silent thief in the night. Yeah. Not so silent at times. It roars. It really, really tells us it's here. Right. And we saw that a lot. Twenty, twenty one, twenty, twenty two still lingering.

I feel higher than what is being advertised. And it is going to continue to be here. Like the rate of inflation is not constant, but inflation being here is a constant. It is something that we have to plan and prepare for into and throughout retirement. One of the nine critical risks to plan for. And unfortunately, I see a lot of people not including inflation into their plans and preparations for retirement expenses. Well, just a kind reminder that the Fed's target rate of inflation is two percent a year, which is still two percent a year.

Yeah. And that means that expenses double over the course of retirement if they hit their target where they usually are underestimating a little bit at three to three and a half percent. You're you're in your expenses double just like compounding interest.

The the expense would double in about twenty two to twenty four years. All right. Number one, longevity. Why is this a risk, Peter? Well, it's something that we all hope for.

Right. We all hope to live long, healthy, happy lives. But the reality is that even though life spans have gotten longer, they have not necessarily gotten healthier and they've gotten more expensive. And the very longevity that we hope for on one hand increases the odds that we see all of these other risks, not maybe once, not maybe twice, but multiple times over throughout the decades of retirement. So longevity is the risk multiplier.

And if you have a plan in place for lasting financial confidence into and throughout retirement, if you've got an optimized retirement plan, then hopefully you can turn that longevity back from a risk to a blessing and something that you are indeed hoping for. Mm hmm. OK. So, Peter, let us walk people through how they can get their hands on their own downloadable version of this countdown to retirement that we have. Yeah. And we covered in a previous edition the 10 steps to prepare.

Today, we're talking about the nine critical risks to plan for. It's got ten, ten different downloadable reports all in one guide. They're packaged up in one download. It's available on the Web site. You go to rich on planning dot com Roshan planning dot com. Go to the resources tab and then go to downloads. And right there, there's the ability for you to download a budgeting worksheet, a copy of my book, a digital version and these series of reports, the countdown to retirement right there.

Just click the download button and you can get it off the Web site. Rich on planning dot com. Or, of course, you can give me a call. My myself or any member of my team would be happy to email you out a copy if you'd like to do it that way. And you can give us a call at nine one nine three zero zero five eight eight six. All right. Peter, thanks so much for your time today. I appreciate it. Always a pleasure. And thank you.

Hey, folks, Peter Roshan here with Roshan planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at nine one nine retired dot com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401K or IRA, this is the Web site.

This is the resource where you can go. You can plug in your own numbers, your information. You can slide the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to. A lot of times it is a very significant savings.

So if you have not yet, go to the Web site nine one nine retired dot com. Run your numbers on the retirement tax bill calculator. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional adviser. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management, a registered investment adviser, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.