Planning for retirement is a challenge for everyone because you have to find money to set aside in savings, invest that money well, and then figure out how to make ends meet once you stop working. Even when everything goes right, retirement planning isn't easy, but the real test comes when unforeseen circumstances might ruin all of your plans.
Fortunately, you can deal with the unexpected rather than letting it crush your retirement hopes. Let's take a closer look at three of the most common problems that people have trouble foreseeing and what you can do to avoid them or handle them when they come up.
1. Having to retire before you expected.
There's a big gap between how long most people expect to work and how long they actually do work. The reason is simple: Unforeseen circumstances come up that prevent you from working into your 60s or beyond. In some cases, a health condition stands in the way of being able to stay in your job. For others, corporate moves lead your employer to cut back on staffing, and high-priced older employees often find themselves the first to go. Even if you're fortunate enough to get a severance package, it might not last long enough to get you to the age you expected to retire.
The first thing to do when you have to retire unexpectedly is to look at your actual and potential income and expenses, working to maximize money coming in and cutting unnecessary costs. Getting part-time work is sometimes an option to help supplement income from investments or other sources, and looking at whether Social Security or other pension income might be available to you before full retirement age is worth the effort.
After you have a handle on what you're taking in and what you're spending, the next step is to figure out a longer-term strategy to make ends meet on your new budget. If you have enough, you're good to go. If not, you can look at some of the resources for retirees on limited incomes can use to help make ends meet until more typical retirement benefits become available.
2. Dealing with a badly timed stock market drop.
Everyone understands the stock market rises and falls in cycles over the years. Yet when it comes time to plan for retirement, this basic fact can be very hard to deal with. If the market drops right after you retire, you could find yourself with a far smaller retirement nest egg than you had expected.
There are several ways you can address this risk. One is to use specialized financial instruments designed to provide money later in your retirement, ensuring a basic income even if your money doesn't go as far as you had expected. For instance, a deferred income annuity allows you to pay a premium now in exchange for a guarantee of future payments from an insurance company once you reach a certain age.
Also, easing back on your stock market exposure as you age can help insulate your assets from a falling market. As you'll see below, though, there are sometimes reasons for keeping the portion of your money in stocks higher than you might think. Still, if you're willing to give up some potential future growth -- and you have the assets to do so -- then being slightly more conservative can offer a good solution to any unforeseen market moves that could put you in dire straits.
3. Not having the income you'd expected to get from your investments.
Recently, many retirees have found that they can't generate the income they need from their savings. Bank products pay almost no interest, and it's hard to do much better in traditional fixed-income investments like bonds.
There are ways to get more income from your investments, but you have to be careful about how much you rely on them. In recent years, many investors have shifted into dividend-paying stocks, with superior yields compared to bonds, bank CDs, and savings accounts. After six years of a bull market, though, some investors have forgotten just how hard stocks can fall. For that reason, shifting entirely into risky investments just to get more income isn't a smart way to go. Nevertheless, a diversified mix of income investments that includes not just bonds, but also dividend-paying stocks, real-estate investment trusts, royalty trusts, and other niche investment assets can limit your risk while giving you the income you need.
Retiring well takes effort, and dealing with unforeseen circumstances makes it even harder. Nevertheless, with some forethought, you can put yourself in the best position possible to deal with unexpected surprises and come out on top.