Key Points
It’s important to make sure your retirement income plan is resilient.
Make certain your numbers line up even if there’s an early market crash or period of soaring inflation.
Also prepare for your medical costs to be higher than expected.
If you’re planning to retire in 2027, you’ve probably spent years building your nest egg and estimating how much income you’ll need to cover your expenses. You’ve probably also spent time thinking about when you’ll claim Social Security to maximize your monthly benefits.
But even the best retirement plan can fall apart if you don’t prepare for unexpected challenges. If you’re planning to retire very soon, it’s important to test that plan against a few realistic but troubling scenarios. Doing so could help you identify weak spots before you wrap up your career, giving you time to adjust your savings, spending, or investment strategy.
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Here are three specific situations to plan for.
1. An early market crash
One of the biggest risks new retirees face is a significant stock market decline early in retirement. If you’re withdrawing money from your IRA or 401(k) while your investments are losing value, you may be forced to sell assets at lower prices.
This is known as sequence-of-returns risk, and it could have a lasting impact on your retirement savings. Even if the market eventually recovers, your portfolio may never fully bounce back if you’ve already sold off a large portion of your investments to cover near-term living expenses.
When stress testing your plan, ask yourself how you’d handle a 20% to 30% market decline that takes several years to recover from. Could you temporarily reduce your spending? Do you have enough of a cash cushion to avoid selling stocks during a downturn?
Having a plan for a market slump is crucial and may involve adjusting your portfolio composition. The time to make those changes is now, as opposed to once you’re in that situation.
2. Higher inflation than usual
If you’ve been paying attention to inflation, you may know that it’s been elevated in recent years. And there’s no guarantee that you won’t face similar periods of higher-than-average inflation throughout your senior years.
If that happens, your retirement income may not stretch nearly as far as you planned. So it’s important to stress test your income plan by increasing your projected annual expenses and seeing how your savings hold up over 20 or 30 years.
If your plan starts to fail, you may want to consider working an extra year to boost your nest egg or adjusting your expected spending. You may also want to consider delaying your Social Security claim for larger monthly checks. Each year you wait beyond full retirement age, up until age 70, gives your benefits an 8% boost.
It’s also worth reviewing whether your investment portfolio has enough long-term growth potential to keep up with rising prices. Maintaining some exposure to stocks could help you outpace inflation in retirement even when it runs hot.
3. Large medical bills
Healthcare is one of the hardest retirement expenses to predict. While Medicare helps cover many costs, it doesn’t pay for everything.
You could still face premiums, deductibles, and other expenses that could cost more than expected. Plus, a serious illness or extended hospital stay could leave you paying a lot more for healthcare than what you’ve budgeted for
When stress testing your retirement plan, consider what would happen if, in a given year, you’re looking at double or triple your budgeted healthcare costs. Would you need to increase your savings withdrawal rate? Would you need to reduce discretionary spending elsewhere? Planning for larger medical bills today could help prevent difficult financial decisions later.
You need to go in prepared
No one can predict exactly what retirement will look like. But it’s important to make sure your plans hold up even if things don’t always go smoothly.
By testing your finances against a market downturn, a period of persistent inflation, and higher-than-expected healthcare costs, you’ll have a clearer picture of whether your plan is resilient or whether adjustments are needed. And if it’s the latter, a little extra planning now could go a long way.
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