As a busy corporate executive, putting the vast majority of your time and energy into the operation of your company and planning for its future, retirement may not be front and center on your mind. Sure, you save into your retirement plan and know you have plenty of stock options available, but what about the finer details of retirement? There are little-known and often ignored threats that could eat away at the nest egg you have diligently worked to establish. Here are 5 factors that could threaten your retirement savings, along with some strategies to prevent them from derailing your golden years.
Just because you’ve worked hard to save for retirement and built up a nest egg doesn’t mean you can rest easy. Once you start tapping into your savings, you need to develop a dependable strategy to withdraw your funds so they not only last the rest of your life but also don’t get hurt by income taxes.
Corporate executives are typically highly compensated and fall into a high-income tax bracket. While you may not pull in the same numbers in retirement, it’s important to create a tax plan to maximize your take-home income during your golden years.
You’ll need to exercise your stock options wisely, take required minimum distributions into consideration, and be aware of all the details concerning any Supplemental Executive Retirement Plan (SERP) so you don’t get hit with extra taxation or experience financial surprises down the road. For example, many SERPs allow you to choose your future payout date. This allows you to use tax smoothing and stagger payout dates to spread the tax burden around.
A professional who has experience working with executives will be able to help you minimize your taxes while working to create a plan to lower your tax burden in retirement, all while taking stock options, pension, personal retirement savings, and other investment accounts into consideration.
2. Rising Healthcare Costs
According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $151,000 to $255,000 just to cover their healthcare costs in retirement. (1) Without your employer’s health insurance, adequate coverage is typically more expensive and harder to find. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered. Even if you’re confident in the size of your nest egg, you can’t predict exactly how much you’ll need to cover health expenses during retirement, not to mention the possibility of long-term care.
When choosing your health insurance for retirement, make sure you understand all your Medicare options and supplements and work with an experienced professional to help you evaluate these options. For example, many people don’t realize that basic Medicare has no cap on out-of-pocket expenses. A supplement is required to achieve a limit on costs. Comprehensive insurance is more expensive but can cap unexpected expenses. And if you plan to retire before age 65, be sure to get a pre-Medicare policy in place.
3. Ignoring Diversification
Diversification is one of the most talked-about investment strategies for a reason: it helps protect your investments from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings.
Working with a professional, evaluate your portfolio’s current allocation in order to determine if it needs to be rebalanced or diversified. When doing so, it is vital that you look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
4. Not Planning Your Time Post-Retirement
Free time is a major perk of retirement, but when you go from working full-time to not working at all, it can be a shock to your system. This is especially true for corporate executives who have been fully immersed in their jobs for years. Many executives go from running at full speed to stopping completely, and that drastic transition can cause anxiety and depression. But if you plan ahead to fill your time with activities that will fulfill you, you can avoid the negative emotions that can come with this life transition.
According to the Harvard Business Review, almost all former CEOs are still working in retirement, whether in private equity, leadership positions in nonprofits or public boards, teaching, or writing books. They use their high energy and capacity from their working years and transfer it to retirement endeavors. (2) A BMO study on retirement planning reveals that retirees who stayed busy and active, pursued independence, and volunteered their time were satisfied with their life. (3)
The takeaway here is to be intentional about your time in retirement. Make a list of things you want to do, places you want to go, and people you want to spend time with, then strategically map out the details so your goals become a reality. It’s easy to lose your identity when your career ends, but filling your time and venturing out into new territory will help you build a new identity and give you something to look forward to.
5. Premature Loss Of A Spouse
Losing your spouse is devastating, regardless of when or how it happens. And while this is something most try to avoid thinking about, the hard truth is that losing a spouse during the final years of their career can be especially dangerous for the surviving spouse’s financial plan and well-being. Furthermore, retirement and long-term care costs may increase without a spouse to share costs and provide care. Depending on the pension benefits selected, a spouse’s pension may not pay out to the surviving spouse in the event of his or her death. An early death may also decrease the spousal Social Security benefits the surviving spouse receives, leaving him or her with little income.
It’s critical for both spouses to be actively involved in the planning process to avoid a setback if this tragedy occurs. Take the time to consider benefits for the surviving spouse, such as life insurance. Wills, trusts, and beneficiary designations should be reviewed to ensure both spouses are protected financially. You should also create a pension and Social Security strategy to optimize the benefit for the surviving spouse. Examine multiple scenarios and make sure that you are taken care of no matter what happens.
Create An Action Plan
Retirement planning for corporate executives can be complicated and stressful due to the many unpredictable factors that go along with it. However, by understanding some of the risks and common roadblocks you may experience, you can plan ahead for the unexpected and reduce the chances that your retirement plan will fail.
At Haddon Wealth Management, our goal is to help you build a predictable and reliable retirement road map that will protect your assets and ensure you receive the income you need to enjoy your golden years. With our personalized planning process, we can help you prepare for both life’s expected and unexpected circumstances. If you want to get started on your retirement plan or think your current plan needs a second look, call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management for clients who value a relationship-driven approach that delivers customized solutions. He seeks to address clients’ many financial needs in an integrated approach combining both investment management and financial planning which may include some or all of the following: detailed retirement planning using a year-by-year cash flow analysis, tax-minimization estate planning, Social Security decision analysis, education planning, and much more. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856) 888-1744.