Do you hope to retire in the next five years?
Fasten your seatbelts and place your tray tables in an upright and locked position, because you could be in for a perfect storm of events that no other generation has faced before.
Below are three significant threats that could jeopardize your financial security in retirement.
Threat #1: Inflation is rearing its ugly head
Inflation robs you of your purchasing power in retirement.
Over time, what was once an affordable everyday expense becomes an unthinkable luxury. Inflation hasn't been on anyone's radar for decades because rates have been at historic lows. But the economic fallout from the pandemic combined with government spending has changed that.
Now, inflation is rising faster than economists have predicted. Much faster.
Just in the month of April, the inflation rate rose to 4.2%. To give you some context, that was the fastest increase since the 2008 financial crisis. But that's not the biggest story here. Inflation has been accelerating every month this year.
According to economist and inflation expert Peter Schiff, if you extrapolate the first four months of this year, we could see a 20% increase in consumer prices in 2021.
Some economists contend the U.S. is on the verge of its worst bout of inflation in decades.
So, here's what this really means for you. Let's say you've projected you'll need $4,000 to $6,000 a month in retirement. But when you factor in inflation, that number could increase to $5,000 to $7,000 a month.
And because you're withdrawing more money every month to maintain your lifestyle in retirement, you run a greater risk of running through your entire life savings far too soon.
Threat #2: Generating income is more challenging than ever
For generations, traditional fixed income options including CDs, savings accounts and bonds have served retirees well.
Unfortunately, those days are over.
Interest rates have been next to 0% for more than 13 years. If you invested $250,000 in a one-year CD today it would fetch approximately $125 a month. And that's before taxes.
Retirees in search of higher yields are forced to invest in a fully-valued stock market. Obviously, that's a dangerous alternative at this stage of the game. But this isn't the only challenge with generating income in retirement today.
70% of Americans fear outliving their money in retirement more than they fear death itself.
We're living longer than ever before.
It's commonplace to know several people who are thriving in their late 80s or 90s or have even celebrated their 100th birthdays. This means your hard-earned savings have to last much longer, right?
That's why it's critical you have a strategy to generate income (from a variety of sources) that will last as long as you do. Otherwise, you could end up being 85 years old, full of life and flat broke.
Threat #3: Taxes could be your biggest expense in retirement
Taxes could be the greatest threat to your financial security in retirement. Like most people, you may think you'll be paying fewer taxes in retirement.
This makes sense because you're no longer earning a paycheck. But unfortunately, that won't be the case for most hard-working Americans.
When you add up the taxes from your IRA and 401K withdrawals, social security benefits, and investment income, you could be paying a lot more taxes in retirement than you expected.
57% of Americans rarely consider how much they will pay or be paying in taxes in retirement.
There's one more item worth mentioning here. Most people don't realize it, but taxes are lower now than they've been in the last 40 years.
But this could change very soon.
We've been through a lot in the past couple of years and we've taken on trillions of dollars of additional debt. But we all know that money doesn't grow on trees—somebody has to pay for it. Chances are, we will all pay for it through tax increases. And that would be especially painful and untimely for anyone who's retired or nearing retirement.
These are unprecedented times with significant challenges. But believe it or not, you have more control over these challenges than you know. As an example, you have more control over how much you pay in taxes in retirement than at any other time in your life.
And if you take advantage of some simple tax planning strategies now, you could save yourself tens of thousands—if not hundreds of thousands of dollars in retirement. The window of opportunity to save on taxes could be closing soon. So don't wait.
If you have $200k or more saved for retirement and want to learn exactly how much money you could see in taxes in retirement, schedule a free Retirement Tax Analysis with one of our fiduciary advisors by clicking here or calling 801-216-3683.
Ryan Thacker and Tyson Thacker are the Founders of B.O.S.S. Retirement Solutions with 6 offices throughout greater Salt Lake City. They are three time winners of Utah's Best of State Award.
Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions. The information contained in this material is given for informational purposes only, and no statement contained herein shall constitute tax, legal or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor. Our firm is not affiliated with the U.S. government or any governmental agency.