Top Challenges for New Retirees and How to Overcome Them

Retirement is an exciting and fulfilling milestone many strive for in their careers. However, as people transition into their golden years, several financial challenges can arise, such as settling into a new lifestyle, tapping into retirement savings, or planning for increasing healthcare costs. Without addressing these issues, it can leave you feeling overwhelmed or uneasy about the next chapter in your life.

In this article, we’ll explore the five major challenges new retirees face. We’ll also provide insight into what one can do to overcome these obstacles as you settle into your new reality. To help provide clarity and potential solutions, we’ve included expert insights from financial advisors.

1. Managing Your Cash Flow and Lifestyle

You’ve likely become accustomed to receiving a regular, steady paycheck from a job during your adult life. Once you retire, though, this isn’t necessarily the case. Instead, you’ll likely receive income from various sources, including your Social Security benefits, a pension, or savings or investment accounts.

Because you’ll be receiving your income from different places, it’s up to you to ensure you have a holistic image of how much you’re earning each month vs. what you’re spending. Improper management of your monthly cash flow, such as due to overspending, can leave you going backward and more quickly drawing down your savings. For this reason, it’s wise to have a budget in place to know where your money is going and how much is available to spend.

“Some income sources such as a pension and Social Security are fixed monthly amounts, along, perhaps, with income from a post-retirement job,” explains Dr. Barbara O’Neill, CFP^®, AFC^®, CEO and owner of Money Talk. Once a person identifies and understands these figures, she adds, “they can be plugged into specific financial calculators called Monte Carlo that use probability modeling to simulate possible future investment outcomes, based on historical data. Monte Carlo calculators predict the probability of success (i.e., not running out of money during your lifetime).”

The other issue with retirement, however, is determining what lifestyle you want to live and balancing it with what you can afford. It’s common for people to want to spend their retirement traveling, diving into hobbies, or providing for grandchildren. You’ll need to plan and figure out how much of your goals you can fit within your budget.

Jordan Taylor, an independent financial advisor at Core Planning in Birmingham, Alabama, explains the importance of preparing for your desired retirement way of life, “When you plan for that lifestyle, you’re going to be WAY MORE aggressive about your saving. You’re going to be more detailed with your planning.” For example, he says he builds “bond ladders for [his] clients,” which can help people receive fixed income throughout their retirement.

2. Deciding How to Withdraw Your Savings

Up until retirement, the main goal for most is saving and investing to accumulate the nest egg and income sources they’ll have for the rest of their life. However, another challenge is deciding how to tap into those savings, especially if you have money in taxable accounts, such as a 401(k) or traditional IRA.

There are many recommendations in the world of finance for how you should draw funds from your savings and investments for retirement. For instance, the 4% rule involves withdrawing approximately that percentage of your saved funds annually. However, catch-all strategies like this can present issues, such as being too much or too little to withdraw. We recommend speaking with a financial advisor to determine the approach that works for you.

According to O’Neill, another issue is any income tax “owed by ‘super savers’ who must start taking required minimum distributions (RMDs) from tax-deferred accounts.” By doing so, they may end up “in a higher tax bracket than when they were working.” For this reason, it’s crucial to ensure you’re planning for the tax burden that future distributions will cause.

3. Shifting Investment Strategy to Preserve Assets

For many, retirement is the ultimate financial goal they’ve been planning for their entire life. And, once a person is nearing it or is already there, their risk tolerance will likely decrease to preserve what they’ve built. This typically involves shifting one’s asset allocation to lower-risk investments that provide fixed returns, such as:

• Bonds
• Money market funds
• Certificates of deposit (CD)

Along with shifting to a more conservative investment strategy, it’s also important to be aware of the impact that inflation can have on your purchasing power over time. Per Merrill Lynch, an annual 2.5% rise in the price of goods and services can lessen a dollar’s purchasing power by about 46% over 25 years. To combat increasing costs over time, financial advisors often recommend:

• Investing in fixed-income securities. Assets that provide fixed income can be beneficial in fighting inflation. This includes bonds, money market funds, and, in some cases, dividend-paying stocks.
• Avoiding holding large amounts of cash. Holding too much of your money in cash can result in inflation eroding its purchasing power. For this reason, it’s common for an advisor to recommend that you keep some liquid while investing much of your net worth in securities that can provide modest returns through fixed income or market growth.
• Maximizing all income sources. Once you retire, it’ll be up to you to maximize your income through different sources, including your pension, Social Security, and investments. By increasing your take-home pay each month, you can combat the rising costs of goods and services.
• Reducing your tax burden. Taxes can eat into your net income, but by finding crucial deductions and, with the help of an advisor, through tax-loss harvesting, you can potentially reduce what you owe each year.

Market volatility is another crucial issue to watch out for as a new retiree. Once you retire, there’s always a risk that the markets could drop and reduce the value of your assets. This is another reason advisors often recommend that people begin shifting their portfolios to more conservative, fixed-income securities.

4. Preparing for Healthcare and Long-Term Care Costs

An unfortunate reality of retirement is that it also means a person is getting older. While one may enter their golden years healthy, they may require long-term health care later on. According to the U.S. Department of Health and Human Services (HHS), 70% of American adults who reach the age of 65 end up needing long-term services and support before they die.

Long-term care can be an expensive burden on the lives of retirees. Per a study by Genworth, the median cost for a person to live in an assisted living facility was $5,350 each month in 2023. Long-term care insurance is one option to prepare for these expenses. We recommend talking to a financial advisor to determine your need for this coverage as you enter retirement.

5. Planning an Estate

Leaving a legacy to the next generation is an important step for many who enter their retirement years. With a proper estate plan in place, you ensure your assets go where and to whom you want. It will also make life much easier for beneficiaries such as family and friends.

With the assistance of a financial advisor and an estate planning attorney, you’ll be able to create an estate plan that works for you and your family. This includes drafting a will, naming beneficiaries, and, if necessary, lessening or avoiding estate taxes.

Bottom Line

As a new retiree, there are a variety of obstacles to tackle. This includes deciding where to source your income, shifting your investment strategy, or paying for long-term care, if necessary. Many of these are complex issues; however, with a financial advisor on your side, it can be easier to overcome them.

Even if you haven’t consulted with an advisor yet, we recommend meeting with one as you approach retirement. They can help you determine how to optimize your income for the lifestyle you want and avoid crucial mistakes. Below are the types of professionals that can assist with this:

• Certified Financial Planner (CFP). These are experts who are skilled in helping clients plan various areas of their finances, including retirement, cash flow, education, and investments. They receive their title from the CFP Board after passing a set of rigorous requirements, including on-the-job experience and an exam.
• Chartered Financial Consultant (ChFC). ChFCs are professionals who are experienced in advanced financial planning. They can help with tasks like retirement planning, investment planning, and more.
• Retirement Income Certified Professional (RICP). RICPs specialize in helping clients plan their income once they retire, such as through Social Security, pensions, or investments.
• Chartered Retirement Planning Counselor. (CRPC). These professionals assist clients with various retirement planning tasks, such as selecting investments or optimizing income.

If you need help selecting a financial advisor near you, consider using this free matching tool. After filling out a brief quiz regarding your goals and current financial situation, it’ll match you with an expert that suits your needs.