In mountain climbing, going up and down the mountain presents distinct and different challenges, even though the conditions are largely the same. Gravity is gravity, but we deal with and react to it differently while going up vs. going down.
Similarly, “going up the mountain” of accumulating assets for retirement is different than “going down the mountain” when drawing upon our assets to generate retirement income. There are economic forces that are always present during both phases, but we deal with and react to them differently.
Of all the risks that we face, there are 5 notable ones:
1. Income Taxes:
a. When we are working, we can lower our current tax bill by contributing to traditional retirement accounts like 401(k), 403(b), etc.
b. When we retire, distributions from those traditional plans will be fully taxable as ordinary income. Often, folks think that they are going to be in a lower tax bracket in retirement, but this often represents just guessing on what future tax rates will be and how much income you’ll want or need when you get there.
2. Inflation
a. And speaking of taxes…inflation is often called a “stealth tax” because you can’t often see it, yet it erodes your purchasing power. The way we address it while we are working is by earning more through pay raises, promotions, etc.
b. Without a plan for how to address it in retirement, the impact of inflation often means we buy less with the same dollars, thereby compromising our lifestyle.
3. Market Volatility
a. No one likes to see the balance of their financial accounts go down; but when you are working and have time to accumulate money that you’re going to spend later, market volatility does not materially impact your results.
b. However, when you retire, if you are withdrawing money to buy groceries from accounts that have declined, that can be a “double whammy” from which you may not be able to recover.
4. Sickness/Injury
a. When we are working, the potential for sickness/injury is a threat to our income.
b. When we retire, the potential for sickness/injury becomes a threat to our assets, as the cost of care (particularly long-term care) can exceed hundreds of thousands of dollars per year.
5. Mortality
a. When we are working, the threat of passing away too soon means that our career earnings may be cut short.
b. When we retire, the possibility of living a long life presents its own unique concerns. In addition to creating a need for income for a long period, a long life will also exacerbate the impact that all of the other risks mentioned above will have.
Not sure if you’ve positioned yourself for the journey both up AND down the mountain? Reach out to us. We’ll talk you through some strategies that will help you prepare for all of the above and create the highest probability for success on both sides of the journey.