:max_bytes(150000):strip_icc()/GettyImages-652734154-873d5a5b8600451699a4b2e107a961e7.jpg "Here Are 3 Hidden Financial Red Flags in Retirement")
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Key Takeaways
- Financially supporting adult children can quietly erode retirement savings if it comes at the expense of your own long-term security.
- Market downturns early in retirement make rigid withdrawal rules risky, underscoring the need for flexibility and having a cash buffer.
Even for the well-prepared, things can go awry in retirement—whether it’s entering your golden years during a bear market or facing an unexpected death.
While you might not be able to plan for every surprise, Investopedia spoke with financial experts to understand what hidden red flags commonly arise for people during retirement and how you can prepare.
1. Helping Out Adult Children
It may be tempting to provide extra money to your adult kids when they need help affording a down payment or paying for graduate school, but make sure you’re not helping them to the detriment of your own retirement plans.
“Regarding supporting adult children, retirees are coming from a place of generosity and love. While I wholeheartedly support giving with a warm hand, I like to ensure my clients aren’t sacrificing their own financial security by doing so,” said Annie Garland, a certified financial planner (CFP) at WealthClarity.
What This Means For You
Before you retire, consider how you’d handle your adult kids asking you for money or what you’d do if you experienced a market decline in the first few years of retirement. Preparing for these possibilities can help strengthen your retirement security.
2. Ignoring the Possibility of a Market Downturn
The 4% rule is a common rule of thumb in the world of retirement planning, but it’s important to personalize it.
The 4% rule suggests that a retiree can withdraw 4% of their portfolio in the first year, adjusting for inflation every year after that, and have their money last during a 30-year retirement.
However, Jean Chatzky—a personal finance writer and founder of HerMoney Media—recommends that people be flexible with their withdrawal rate, modifying it if they experience a market downturn at the start of retirement or have a longer retirement horizon.
“Where the 4% rule becomes really problematic [is] when you have a downturn in the first few years of your retirement,” Chatzky said. “And that’s when [the] 4% rule really starts to, if not fail, then eat into people’s ability to know that their money is going to go the distance.”
If the value of your portfolio declines at the beginning of retirement, you may need to sell more of your assets to fund your lifestyle. This could leave you with a smaller nest egg later on.
To mitigate this possibility, which is known as sequence of returns risk, Chatzky suggests a couple of strategies: having at least two years’ worth of expenses in cash or maintaining a lower standard of living during this period.
3. Delaying Estate Planning
When it comes to estate planning, you may want to put off the conversation due to discomfort, avoiding the issue. However, doing so is ill-advised, warns Patti Black, a CFP at Savant Wealth Management.
“We know death is inevitable, yet people regularly put off getting a will and checking beneficiaries on their 401(k), IRA, and life insurance and making sure [their] family knows where important documents are kept,” said Black. “It’s difficult to lose a spouse, but even more difficult when the surviving spouse has to spend more money hiring an attorney because estate issues were not addressed proactively.”
Consider engaging in these conversations early on with a lawyer, financial planner, and your family. That way, your loved ones know what to expect when you or your spouse passes away.
