The Fort Worth Press - Retirement Income Mistakes: 5 Potential Errors That Can Threaten Your Financial Security

While building wealth is important, retirement is not solely about how much money you have accumulated. It is also about how much income your assets can generate and whether that income is expected to support your needs throughout retirement.

The reality is simple: income funds retirement. Your monthly bills are paid with income, not account balances. If your income is predictable and reliable, retirement can be enjoyable and stress-free. If your income is uncertain, even a large portfolio can create anxiety.

Unfortunately, many retirees make common mistakes that can put their retirement security at risk.

Mistake #1: Not Knowing Your Monthly Fixed Expenses

One question I believe every retiree should be able to answer is:

"What does it cost me to live each month?"

Surprisingly, many people cannot answer that question accurately.

Your fixed expenses may include:

• Mortgage or rent

• Property taxes

• Utilities

• Insurance premiums

• Groceries

• Transportation costs

• Healthcare expenses

• Debt payments

Without knowing these numbers, it becomes impossible to determine how much income your retirement plan must generate.

A successful retirement plan begins by identifying essential monthly expenses and creating a strategy to ensure those expenses are covered every month regardless of market conditions.

Mistake #2: Using Retirement Accounts Like Checking Accounts

Many retirees treat their IRA or retirement account as a checking account. Whenever they need money, they simply withdraw it.

Need money for property taxes? Take it from the IRA.

Need money for a new roof? Take it from the IRA.

Need money for monthly bills? Take it from the IRA.

While this may seem convenient, it can create unnecessary tax consequences.

Every withdrawal from a traditional IRA is generally taxed as ordinary income. The more money you withdraw, the more taxable income you create. Over time, this can push you into higher tax brackets and reduce the efficiency of your retirement plan.

Rather than making unplanned withdrawals, retirees may benefit from a structured income strategy designed to provide consistent cash flow while taking tax considerations into account.

Mistake #3: Pulling Income from the Wrong Account

Many retirees rely on a single account-usually an IRA-to generate all of their retirement income.

This can create a domino effect of problems.

Large IRA withdrawals can:

• Increase taxable income

• Cause more Social Security benefits to become taxable

• Increase Medicare Part B and Part D premiums

• Accelerate the depletion of retirement assets

Many retirees are surprised to learn that one withdrawal decision can affect multiple areas of their financial life.

A coordinated income strategy can help reduce these unintended consequences while creating greater predictability and efficiency.

Mistake #4: Taking Too Much Risk with Life Savings

Many investors continue taking the same level of risk in retirement that they took while working.

When you're employed, a market decline can often be tolerated because you still have a paycheck and years to recover.

Retirement changes the equation.

Once your paycheck stops, your portfolio becomes one of the primary sources of support for your lifestyle.

A significant market decline during retirement can have a much greater impact because withdrawals continue while account values are falling.

While investment returns are an important consideration, they are only one component of a retirement strategy. Many retirees seek to balance long-term growth, risk management, and income generation based on their individual goals and circumstances.

One question to consider is:

"If my investment portfolio declined by 30% due to market conditions, how would it affect my lifestyle and retirement income?"

If that scenario would significantly affect your financial goals or ability to meet your income needs, it may be appropriate to review whether your current investment strategy and risk exposure continue to align with your objectives.

Mistake #5: Relying on the Stock Market to Produce Retirement Income

One reason some retirees may take on higher levels of investment risk is the expectation that long-term market returns will support ongoing retirement income needs. While equity markets have historically experienced long-term growth, retirement income needs occur on a more immediate and ongoing basis.

Regular expenses such as housing, utilities, taxes, and healthcare continue regardless of market conditions. As a result, some retirees rely on portfolio withdrawals during periods when investment values may be fluctuating.

This dynamic is often referred to as sequence-of-returns risk, which describes the potential impact that negative investment performance in the early years of retirement may have on portfolio longevity, particularly when withdrawals are being taken.

Because withdrawals continue while account values fluctuate, unfavorable market conditions early in retirement may reduce the amount of assets available to support future income needs.

An Example of Market Risk

Let's assume a retiree enters retirement with a $1,000,000 portfolio and plans to withdraw $50,000 per year to supplement Social Security.

Everything looks fine until the market experiences a 30% decline.

Suddenly, the portfolio falls from $1,000,000 to $700,000.

At the same time, the retiree still needs the same $50,000 annual income because their bills haven't changed.

Now imagine the retiree becomes nervous. They watch financial news every day, see alarming headlines, and begin worrying that things could get worse. Fear starts to replace confidence.

To avoid losing more money, they decide to sell investments and move to cash.

The problem is that they have now locked in a 30% loss.

Historically, markets have recovered from major declines, but the retiree may no longer participate in that recovery because they sold after the drop occurred.

The portfolio has permanently shrunk from $1,000,000 to $700,000, and withdrawals continue.

A $50,000 withdrawal from a $1,000,000 portfolio represents 5% of the portfolio.

A $50,000 withdrawal from a $700,000 portfolio represents more than 7% of the portfolio.

The same income need now places more pressure on the remaining assets.

This combination of market losses, ongoing withdrawals, and emotional decision-making can increase the risk of running out of money later in retirement.

The challenge isn't just the market decline itself, but the way that retirees may react emotionally and may make reactive decisions based on temporary market conditions that can have long-term impacts on their financial plans.

Retirement income strategies are often designed to avoid relying entirely on stock market performance. While markets can be effective tools for long-term growth, they are not designed to provide guaranteed income.

A retirement income plan may incorporate multiple sources of income and liquidity so that essential expenses can be addressed even during periods of market volatility.

One Approach: The Two-Account Retirement Strategy

One way some retirement income strategies are organized is by separating assets into two distinct purposes.

Account #1: The Income Account

The first account is designed to generate dependable monthly income.

Its purpose is to work alongside Social Security benefits to ensure all essential expenses are covered every month.

The goal is simple: provide reliable income for housing, food, insurance, healthcare, utilities, and other necessities.

By aligning a portion of assets with near-term income needs, some retirees find it easier to manage ongoing expenses regardless of short-term market fluctuations.

Account #2: The Lifestyle Account

The second account serves a different purpose. This account is designed for growth and discretionary spending.

Examples include:

• Vacations

• Travel

• Home improvements

• Hobbies

• Gifts to family

• Entertainment

• Legacy goals

Because your essential expenses are already covered by Social Security and the income account, this account can remain invested with a longer-term perspective.

When markets perform well, retirees can enjoy more lifestyle spending. When markets decline, they can temporarily reduce discretionary withdrawals without affecting their ability to pay essential bills.

This separation helps remove emotion from financial decisions and reduces the pressure to sell investments during difficult markets.

Retirement Success Begins with Income

Many retirement strategies focus not only on account balances, but also on how those assets may be used to support ongoing income needs throughout retirement.

One common approach is to align essential expenses with more predictable sources of income, while using a separate portion of the portfolio for longer-term growth and discretionary spending needs. This structure may help investors better understand how different parts of their portfolio support different goals.

Rather than focusing solely on account values, retirement planning often involves evaluating how assets may translate into income over time and how that income can support ongoing expenses.

While investment accounts can fluctuate in value, retirement income strategies are typically designed with both current income needs and long-term portfolio sustainability in mind.

A key objective in many retirement plans is to help support ongoing income needs throughout retirement, recognizing that income needs and market conditions can both change over time.

Steven Suib - President of Preservation Wealth Management
(610) 768-7789
[email protected]
630 Freedom Business Center Drive, 3rd Floor King of Prussia, PA 19406

Disclosure: Advisory services are offered through Steven Suib, Inc. dba Preservation Wealth Management, an Investment Advisor in the State of Pennsylvania.

SOURCE: Preservation Wealth Management

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F.Carrillo--TFWP