The Top 5 Financial Planning Challenges in the First 10 Years of Retirement

By Jeremy Wallace and Andrew Hart

After decades of diligent working and saving, retirement is finally just around the corner. Now that you’re about to reach this milestone, you’re probably ready to put those years of calculating, strategizing, and saving behind you. But don’t hang up your financial planning hat just yet! In order to take full advantage of your golden years, it’s important to continue to make sound financial decisions and take action when it comes to your financial strategy. 

Retirement comes with its own set of hurdles, and we’ve found that most retirees face the same 5 financial planning challenges within the first 10 years. Let’s discuss these challenges so you’re prepared and confident to tackle them head-on.

1. Not Creating a Withdrawal Strategy

How do you turn your hard-earned savings into an income stream to replace the income you will lose from not having a steady paycheck? It’s not an easy question, but how you take your money out is just as important as how you put it in. It includes tax planning, reviewing your tax return, and, most importantly, distribution optimization. That’s why you should capitalize on your wealth by determining a tax-efficient way to withdraw funds in your golden years. 

Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s get taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate. 

Calculating when might be the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill when you’re trying to stretch your money for decades. Create a withdrawal strategy with the help of a trusted professional who can assist you in withdrawing funds at a sustainable rate and help ensure that you’re doing it in a tax-efficient way.

2. Throwing the Budget Away

Many people spend their retirement years doing all the things they never got to do when they were working: starting a passion project, remodeling the house, traveling the world, and more.

It’s easy to underestimate the amount of money you’ll spend during those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can shave years off the longevity of your assets. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy, and then create a budget, tracking your money along the way so you stick to your goals. 

3. Ignoring Inflation

Another major challenge we see new retirees face is the desire to play it safe in the stock market. This can do more harm than good as it can lead to inflation risk. 

The long-term average inflation rate for healthcare expenditures is 5.23%, (1) and the current average inflation rate is a whopping 5.3%. (2) This means retirees are more likely to feel the effects of inflation due to necessary expenses, such as healthcare costs. 

As tempting as it may be, resisting the urge to worry about short-term stock market volatility may be a good option. With a retirement that could easily last 20 to 30 years, inflation is still a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between principal protection and growth. 

A 2021 Retirement Risk Readiness Study from Allianz insurance company found that 71% of participants were worried about the rising costs of healthcare, 67% were worried about rising costs of living, and 66% were worried that market downturns would affect their savings. (3) These percentages represent significant increases from the survey’s 2020 results. (4)

With a retirement that could easily last 20 to 30 years, inflation is a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between principal protection and growth and be proactive about inflation risk. 

4. Neglecting to Create an Emergency Fund

Could you comfortably pay for an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is no. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years. 

Most professionals recommend that retirees have at least 12 to 18 months of expenses in an easily accessible savings account. (5) This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it can provide stability during economic downturns. This means you can optimize your portfolio to help beat inflation, as suggested above, while having a safety net to fall back on. 

There are other factors that should be considered in determining how much of an emergency fund to maintain, including pensions, other guaranteed income streams, and your required minimum distributions (RMDs). Working with a professional can help you determine how much of an emergency fund to maintain given your specific situation.

5. Planning on Your Own

Although you might have handled your personal finances solo up until now, retirement is not the time to wing it. You turn to a doctor for health concerns. You turn to a mechanic for car trouble. So why not enlist the help of an experienced financial professional to help you achieve the best retirement possible? 

Our team at Wallace Hart Capital Management would love to be the qualified professionals you turn to for help tackling these challenges (and others) on the road to a comfortable retirement. We believe in empowering our clients through education. That’s why we spend time explaining our strategy and process, so you can understand our decision-making and how we help protect your financial lifestyle throughout every stage of life.

Having a trusted wealth manager by your side can be the difference between having a retirement fund that dries up or one you can’t outlive. To get started, contact us at 859.300.3030 or request an appointment online today!

About Jeremy

Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and  he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.

About Andrew

Andrew Hart is co-founder and chief planning strategist at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Andrew has 15 years of experience in the financial industry and strives to provide new and better strategies and processes to improve his clients’ lives. Andrew graduated from Wittenberg University with a bachelor’s degree in business management and holds a certificate in financial planning from Georgetown University and the CERTIFIED FINANCIAL PLANNER™ certification. When he’s not working, you can find him enjoying the city of Lexington, Kentucky, teaching at the University of Kentucky’s Financial Planning program, and spending time with his wife, Susan, twin sons, George and Ted, and daughters, Merritt and Philippa. To learn more about Andrew, connect with him on LinkedIn.