Making retirement plans is essential to prepare for your later years. Unfortunately, sometimes plans don't always work out -- and that can lead to financial hardship as a retiree.
The good news is, you can anticipate some of the factors likely to derail your efforts at retirement readiness and take precautions so you aren't left unprepared. In fact, here are four possibilities you should be ready for if you want to maximize your chances of remaining financially secure throughout your retirement.
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1. Outliving your projected lifespan
Living too long is a good problem to have. But if you establish retirement savings goals and make withdrawals from your accounts based on how long you're expected to live, and then you end up beating the odds and living longer, you could find yourself in a tough spot. With an empty savings account, you'd be left struggling to live on Social Security alone and likely facing a big decline in your quality of life.
To make sure longevity isn't a downside in your situation, save as aggressively as you can in anticipation of a very long retirement. The worst that happens if you do that is that you end up with money left over to hand down to your heirs. You'll also want to choose a safe withdrawal rate so you don't drain your retirement account balance too quickly. If you're cautious about how much money you take out of your investment accounts, you shouldn't end up emptying them even if you live way longer than you thought you would.
2. Medical issues leading to high care costs
Many retirees find they start experiencing health issues sooner than expected and that their medical care costs are higher than anticipated. With Employee Benefit Research Institute estimating a senior couple retiring in 2020 could face out-of-pocket costs of $325,000 beyond what their Medicare covers, it's easy to see why you can't afford to be caught unprepared if you unexpectedly get sick.
To make sure you're ready to cover care costs, aim to save some money in a health savings account (HSA) throughout your working life. If you aren't eligible for an HSA, consider using a dedicated IRA (or other tax-advantaged account) that you invest money into and earmark for medical bills. If you're already retired and concerned about unexpected medical expenses, shop for comprehensive coverage during Medicare open enrollment. Depending on your situation, you may find it makes sense to pay higher premiums for better coverage through a Medicare Advantage Plan or by supplementing traditional Medicare with a Medigap policy.
3. Having the wrong asset allocation
If you have too much money invested in the stock market as you enter your later years, you risk incurring outsized losses if the market crashes shortly before you need to begin making withdrawals. Without time to wait out a potential downturn, you may be forced to make losses permanent by selling during a bear market, even if your portfolio could've recovered had you waited. If you're forced to sell stocks at the wrong time, this could cause your account balance to dwindle to a dangerously low level. On the other hand, if you've invested too conservatively -- either during retirement or throughout your career -- you may not earn the type of returns necessary to build and maintain a healthy account balance.
This problem is easy to avoid by assessing your current risk tolerance and rebalancing your portfolio every year. There are lots of ways to do that, including investing in target date funds that rebalance for you or subtracting your current age from 110 to determine the percentage of your portfolio that should be invested in stocks.
4. Paying too much in investment fees
Investment fees can reduce your investment returns substantially, which can be a big problem if you end up with too little money in your later years as a result.
Fortunately, many brokerages offer no-commission trading, and there are ample opportunities to buy stocks or ETFs with few or no fees at all. You should research the cost of any investments you're considering. If you'd have to pay a high fee, make very sure that you're likely to earn a high enough rate of return to offset it. Otherwise, look for a cheaper alternative.
