It’s like Mark Twain said, “I’ve had a lot of worries in my life, most of which never happened.”
So, in this video, we’re going to talk about:
- Three things that really stress out retirees – that I’ve NEVER ACTUALLY SEEN ruin a financial plan,
- Why they matter less than you think, and
- How to reframe your thinking around these pain points.
And to start, let’s talk about one BIG worry that’s on everyone’s mind right now.
Inflation
We’ve all experienced the effects of inflation over the last few years. We even saw the annual inflation number peek over 9% back in June of 2022.
And of course, this led many retirees to wonder if they’d be able to afford to buy eggs for breakfast.
Since then, thankfully, inflation has eased, and prices have at least stopped going up as much as they had been.
But is inflation something that we should be worried about in retirement? Or is it one of the stresses that we can let go?
Let’s look at an example.
So, Bill and Jane have just retired at age 62. They have around $1 million saved and they’ve just started receiving their Social Security benefits, which total around $5,000 per month.
Given that their after-tax living expenses are around $9,000 per month, including housing and healthcare, they start out with an 4.4% withdrawal rate. Given this, their initial probability of not having to adjust their lifestyle in retirement is 90%.
That’s a solid financial plan. I typically like to see my clients somewhere between 70% and 90%.
But, as one of our assumptions, we’re using an inflation rate of 2.5%. After 2021 and 2022, it’s reasonable to take a step back and wonder if that assumption is valid!
Just for context, inflation ran at 2.9% in 2024.
So, what would happen to Bill and Jane’s plan if we increased that inflation assumption by 1% per year to 3.5%? As you can see, their Monte Carlo drops to 81%. Not as good as before, but they still have a sold plan.
Now, let’s take this a step further. Let’s say that we increase our inflation assumption by 1.5%, taking it all the way to 4.0%. This would cause their probability of not having to adjust their lifestyle to drop to 77%. This isn’t as strong as where we started, but we’re still well within the comfort zone.
Obviously, more inflation is bad for any plan, but that doesn’t tell the whole story. First off, too much inflation for too long would likely cause the economy to slow down and trigger a recession – maybe even a depression. In those kinds of scenarios, inflation drops – or you may even see DEFLATION like we saw in 2009.
So, should we plan for inflation at rates that significantly greater than historical averages? Probably not. And if we wind up in a Wiemar Germany or Zimbabwe type inflation scenario, EVERYONE’S retirement plan falls apart.
What’s more reasonable to assume is that, should inflation spike beyond our norms, retirees will cut back on their spending. They’ll become more frugal about day-to-day expenditures and postpone spending on things like vacations, new cars, or home maintenance. And, in 2025, we’re seeing that play out.
Yes, inflation is scary. But it’s less likely to be the thing that kills your retirement… than the actions you take out of fear to avoid it.
So, how do you let go of this as a retirement stress point?
There are a few things to think about when it comes to inflation and your financial plan:
- Inflation is an external factor that you can’t control. In spite of our best efforts, there is always a chance that our financial plans won’t work. I wish I could tell you otherwise, but this is the nature of life. If things go to hell in a handbasket, we’ll figure it out. But letting go of the desire to control the uncontrollable is the first step toward living a less-stressed life – and avoiding many of the behavioral mistakes that DO wreck financial plans.
- If inflation does spike, one thing you CAN control is your spending. You can punt on replacing your car. You can be a little more frugal with day-to-day expenses. Our retirements are more dynamic than we typically model using financial planning software.
- Also, Inflation can drop just as quickly as it spikes. So, remember the psychological phenomenon known as the “end of history illusion”. Things are never as good or as bad as they seem. So, if you don’t like the way things are, wait around for a while.
- On a practical note, it’s always worth thinking about adding some inflation protection to your investments. Stocks tend to be a great inflation hedge, but TIPS – Treasury Inflation Protected Securities – are something to consider adding to your bond allocation.
- Finally, a spike in inflation will naturally lower your chances of not having to adjust your lifestyle in retirement – but it might not change it as much as you’d expect.
Now that we’ve (hopefully) framed inflation in a more reasonable light, let’s talk about the next retirement stressor that may not be as important as you think.
Taxes
You know, I try not to talk about politics too much on this channel, but the one thing that I think we can all agree on is that no matter who gets elected to Congress, they’re ALL going to spend too much.
And you know what that means – higher taxes.
So, what happens if taxes start going UP?
Well, let’s revisit our friends Bill and Jane to find out.
Given current tax law, their financial plan is pretty solid, with a 4.4% withdrawal rate and an 90% Monte Carlo probability of not having to adjust their lifestyle.
But what happens if their tax expenses go up by 10%? Actually, it’s not too bad – their odds drop from 90% to 89%. That’s barely noticeable.
Okay, what if their tax expenses go up by 20%? Well, now their plan odds are “only” coming in at 87%.
But let’s not stop there. Let’s increase their tax expenses by 30% over what thing would look like using our current tax laws. In this case, their Monte Carlo probability of not having to adjust their lifestyle drops to 86%.
So, what’s going on here? A sizable increase in taxes isn’t moving the needle nearly as much as inflation does. And keep in mind, Bill and Jane have most of their investments in tax-deferred retirement accounts, so all of their withdrawals are taxable income.
Let’s remember that most retirees will naturally see a lower tax rate in retirement than they did during their working years. So, even if their taxes go up in retirement, it’s not as big of a drag on their financial plan as you’d expect.
So, while a tax increase would suck – and it would be our civic duty to complain about it – this is a retirement stress point that, while annoying, isn’t going to be a make-or-break issue for your financial plan.
And if Congress causes us all to go broke, they wouldn’t have any income.
…They do know this, right?
So, how can you reframe the tax issue in a way that allows you to sleep better at night during retirement?
• First, this is another external factor that we can’t control. While I think we can – and should – proactively plan for taxes in retirement, our future tax rate is somewhat unknowable. We need to do the best we can with what we know and move on.
• And, obviously, a higher-than-expected tax rate in retirement isn’t going to help things – but it doesn’t move the needle as much as you’d think.
And this brings me to our final retirement stress point that MAY NOT be as important as we think.
Investment Returns
Let’s go back to our friends Bill and Jane. Outside of their cash holdings, they have all of their investments in their retirement accounts. At age 62, they’ve decided that a blend of growth and stability is right for them. So, 60% of their investments are allocated to stocks and 40% are allocated to bonds.
Based on historical returns, we can expect an annual return of 8.2% for a generic 60/40 portfolio.
But what happens if Bill and Jane don’t get those types of returns?
What if:
- Stocks have lower returns over their retirement than what historical numbers say?
- What if there’s a bear market crash right after they retire?
Well, let’s check out the numbers.
Let’s say that their portfolio lags the expected return number by 0.5%, only returning 7.7% annually instead of 8.2%. In that case, their Monte Carlo probability drops from 90% to 86%. They still have a decent plan.
What happens if their returns are lower by a full percentage? Remember, this is compounded over a 30-year retirement, so any changes are magnified over that time.
In this case, their Monte Carlo probability drops to 80%. Lower, obviously, but still well within the comfort zone.
Okay they’re still in great shape if their returns lag expected returns by a little bit. But what about the scenario where there’s a huge market drop right after they retire? That would be the worst-case scenario, wouldn’t it? The portfolio they needed to live off of for the rest of their lives would take a huge hit in year one.
If there’s a bear market in year one of their retirement – a year when the market drops by 20% – their Monte Carlo probability drops from 90% to 79%. That’s a big difference, but they’re still well within the comfort zone.
Again, even if we put together the best retirement plan ever created, there’s still a chance that things aren’t going to work out the way we expected. There’s a difference between planning for the outcome and controlling the outcome.
So, while lower investment returns can impact your retirement in a material way, they may not impact it more than you expect. Ironically, it’s our actions to AVOID lower investment returns will probably do more damage to our retirement plans than the lower returns themselves would.
This is kind of a rough way to say it, but, when it comes to our behavior around investing, an old advisor I once worked for used to say, “It’s easier to survive a paper cut than a gunshot wound.”
So, how do you let go of the stress around investment returns so that you can keep from making the big mistakes that can actually blow up your plan?
- Have an investment strategy and STICK TO IT. During those times when the market is down, that’s precisely the WRONG time to make a strategy change. If you want to make a strategy change, you need to wait until things are boring.
- Remember that underperforming a few years here and there won’t wreck your plan – of course underperformance doesn’t help, but it may not move the needle as much as you’d expect, and finally
- Keep the right perspective when you watch the news. Just because the market’s down 10% doesn’t mean that you are too.
Now that you’re – hopefully – a little less stressed about these three common retirement worries, there is one retirement issue that DOES matter: HOW you turn your investments into a retirement paycheck.
So, check out this video where I compare the three most popular methods for making retirement withdrawals from your investment accounts. See you there.
If you’re relying on one of these in your retirement and would like a second opinion, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.
