As you approach your late 50s and early 60s, the reality sets in that in the next 10 years you will be retiring. You’re scared and nervous. But you know the clock is ticking, and it’s time to leap into retirement.

Over the course of your working life, you have built a substantial nest egg. You have saved into your retirement account, paid down your mortgage, and paid into the Social Security system, which at the age of 62 will allow you to start drawing a monthly check.

You’re a smart professional, an engineer, medical doctor, or sales executive. You know basic math and start crunching the numbers of what your retirement income could be.

You research Social Security and find that you and your spouse will have $3,500 a month coming in. You do some simple breakeven analysis and decide you should collect now.

Looking at your 401(k), you estimate that it could earn a rate of return of just 7% and if you withdraw 5% of your balance a year, your income will be close to what it is now. Plus, there’s the added benefit that if you die before 85, your kids will inherit some of your money.

You think to yourself, “Who needs a financial advisor? I just planned my retirement.”

Just like that, you push the eject button. Give the boss your two weeks’ notice and ride off into the sunset.

Unfortunately, your retirement plan left a lot to be desired as you forgot to factor in some vital retirement risks. Those risks could derail your perfect retirement scenario, sending you and your spouse to part-time work as a greeter at Walmart.

Market Risk  

The stock market does not go up in a straight line (though it usually goes down in one). We call this phenomenon the stairs up and the elevator down. Some years it will return 15%; others it will return 4%.

Remember the 2008 collapse?

The stock market declined by over 40% that year! Imagine retiring in late 2007 and watching 40% of your portfolio crater.

Many people who retired during 2007 and 2008 were back to work by 2010 because of poor planning.

Inflation

Most people we come across have heard of inflation, but they have no idea what it is or how it affects them.

In 1919, a quart of milk cost 19 cents. Today it costs $2.50 at Walmart and over $5 if you buy it from Whole Foods!

That increase is because of inflation. Over time, if an economy is growing, we expect that prices will rise. Those costs include our necessities: food, clothing, shelter, transportation, etc.

Historically, inflation has averaged 3.25%. This means that for your investments not to lose purchasing power, your money has to earn at least 3.25% per year.

If you are investing in annuities or CDs, or have savings accounts and cash, you are going to lose purchasing power over time.

When you retire, you want your income to keep up with the cost of living (inflation). Most potential retirees forget this fact.

Taxes

The majority of soon-to-be retirees seem to think that when they are retired, Uncle Sam will not come calling. That is untrue.

If anything, managing your taxes in retirement will be more difficult than managing your taxes when you were working.

Most people think that Social Security is a tax-free check from the government. That is false; your Social Security income is subject to taxation above certain income thresholds. You can read more about it here.

Finally, those withdrawals you take from your 401(k) or IRA are also taxable by the federal government and the state in which you reside. The tax rate on those withdrawals is your ordinary income tax rate.

Mainly, it is set up so the more you pull out of your account, the more tax you will owe.

“Great,” you think, “I’m not going to pull money from my retirement account. I will budget and live off my Social Security check.”

Not so fast, hot shot.

You failed to realize that at age 70.5, the government forces you to take money out of your retirement account. This withdrawal is known as a required minimum distribution, or RMD. The larger your account balance, the more you will have to take and the more taxes you will have pay.

This RMD will last as long as you are alive.

Conclusion

Retirement planning is not straightforward. It’s a very complicated process that should be dealt with by a professional who specializes in guiding people to and through retirement.

We have created an ebook to get you started.