Financial Planning for Aging Parents
By Caroline M. Friedrich, CPA, CFP®
After working with hundreds of retirees over the years, we’ve found that most retirees face the same 5 financial planning challenges during the first 10 years of retirement.
If you are nearing retirement and feeling anxious about this transition, then get ready to face your retirement head-on by understanding these 5 financial planning challenges.
Not Creating a Tax-Efficient Withdrawal Strategy
Financial planning doesn’t stop once you enter retirement. Capitalize on your wealth by deciding the most tax-efficient way to withdraw funds in your golden years.
Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
As you can see, calculating the best time to pull from each account is enough to give anyone a headache. But the last thing you want is to get hit with a hefty tax bill.
Create a withdrawal strategy with the help of a trusted professional who can make sure you’re withdrawing funds at a sustainable rate and that you’re doing it in a tax-efficient way.
Overspending in Retirement
Many people spend their retirement years doing all the things they never got to do when they were working—starting a passion project, remodeling the house, traveling the world, and more.
It’s easy to underestimate the amount of money you’ll spend those first few years when you don’t account for all these “extras.” Overspending, even for a short period, can erode your retirement savings. My advice? Create a spending plan. Calculate your monthly income given your withdrawal strategy (See #1) and then create a budget so you understand exactly what you need to retire comfortably.
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This does more harm than good as it leads to inflation risk.
As tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is still the biggest threat to your nest egg. Make sure your retirement investments keep pace with inflation to maintain your standard of living. Sit down with a trusted professional who can help you strike a balance between protection and growth.
Rising Healthcare Costs
Healthcare costs tend to rise as you age, and this can be a significant expense for retirees. The average price of healthcare increased by 1.5% from March 2022 to March 2023, following a previous increase of 2.3%. What does this mean? Retirees are more likely to feel the effects of inflation due to mandatory expenses, such as healthcare costs.
Could you comfortably pay an unexpected, major expense in retirement without jeopardizing your financial future? Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
It used to be recommended to have 3 to 6 months of expenses saved up in an easily accessible savings account, but now more professionals are recommending at least 12 to 18 months’ worth. This may sound like a lot, but an emergency fund serves two purposes: it covers unexpected expenses and it provides stability during economic downturns. This means you can optimize your portfolio to beat inflation (#3 on our list) while having a safety net to fall back on.
Going Through Retirement Alone
Planning for retirement took years. Now is the time to protect that hard work and planning by working with a financial advisor who understands your road ahead.
Whether you’re ready to get started, or simply looking for a second opinion on your finances, we at The Nalls Sherbakoff Group are here to help. Set up a complimentary appointment so we can see if our services are the right fit for you by calling us at (865) 691-0898 or contacting us online.
Caroline Murphy Friedrich is a financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. With over 14 years of experience in the financial industry, Caroline is dedicated to helping her clients make informed, long-term financial decisions that add value to their lives and positively impact future generations. Caroline has deep experience in accounting, having spent the first decade of her career as a CPA. Now she blends that expertise with her CERTIFIED FINANCIAL PLANNER™ certification to design comprehensive plans that incorporate all pieces of their financial puzzle. Caroline is a fiduciary, putting her clients’ interests first as she helps them navigate complex issues and implement strategies created for their unique needs.
Caroline graduated from the University of Tennessee with a bachelor’s degree in accounting and a Master of Accountancy with a concentration in tax accounting. She is a proud Knoxville native who loves to spend her free time with her husband and their three daughters. When she’s not in the office, you can often find her exercising, golfing, reading, or enjoying her friends and family. To learn more about Caroline, connect with her on LinkedIn.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties regarding the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. Please contact us if there have been any changes in your financial situation or investment objectives, or if you wish to impose any restrictions on the management of your account or modify existing restrictions. You may contact us by phone at 865-691-0898 or email at firstname.lastname@example.org. Any indexes reflect investments for a limited period and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.