The years preceding and following the moment you retire can dictate not only the quality of your golden years but also the likelihood that you'll have enough to last throughout retirement.
"As you approach retirement, each move—and misstep—carries a lot more weight," says Chris Kawashima, CFP®, a senior research analyst at the Schwab Center for Financial Research. "Fortunately, with careful stewardship and a little flexibility, you can successfully adjust your retirement plan if you find yourself off course."
Schwab asked more than 150 people nearing retirement with at least $1 million in savings about their approach to this pivotal transition.1 Taking their concerns into account, here are some key risks—and potential solutions—to be mindful of as you navigate the so-called dangerous decade.
Risk: Lifestyle creep
The final years of your full-time career often coincide with your peak income. But as your earnings grow, so can your expenses—and if you're not saving at the same rate, it could be difficult to sustain your lifestyle into retirement. Many savers assume they'll need less income in retirement because they'll no longer be saving for retirement. However, some expenses, such as health care and travel, could actually increase.
When estimating retirement expenses, most people should plan to spend as much as they do preretirement. For example, a couple that earns $300,000 annually will need roughly 15 times that amount, or $4.5 million, to sustain their standard of living over a 30-year retirement. "They won't need all that money on Day 1, but they'll need it eventually," says Susan Hirshman, director of wealth management at Schwab Wealth Advisory, Inc. "And if they're not increasing their savings in proportion to their rising income, they could be forced to make some difficult decisions down the road."
Solution: Ramp up savings
Assuming you're already maxing out your 401(k), IRA, or both, consider putting additional savings in:
- Taxable investments: Unlike tax-deferred savings, which are taxed as ordinary income, withdrawals of long-term gains from your taxable accounts are assessed at 0%, 15%, or 20%, depending on your income (plus a 3.8% surtax for higher earners). What's more, you're not required to take minimum withdrawals beginning at age 73 (75 if you were born in or after 1960) as you are with tax-deferred accounts, giving you greater flexibility over your income and your tax bracket.
- A qualified employer plan: Some workplace retirement plans allow after-tax contributions above and beyond typical annual contribution limits, up to a combined maximum (employee plus employer contributions) of $69,000 in 2024 ($76,500, including catch-up contributions, for those age 50 or older).
Risk: Too conservative, too soon
As they near retirement, many investors believe they should start shifting to a more conservative portfolio allocation that favors capital preservation over growth. However, paring stocks too soon could undermine your portfolio's longevity potential.
"There's a misguided notion that you should cut way back on stocks by the time you retire, but that's not always the wisest approach," Chris says. "If you want your portfolio to last through or beyond your lifetime, the potential for continued growth is an important factor."
Solution: Consider going moderate
Today's retirees may want to keep more than half of their investable assets in equities in their first decade of retirement. "The rationale behind such a stock-heavy portfolio has to do with longevity," Chris says. "Those who stop working at age 65 may need to stretch their savings for 25 years or more, and since you don't need to tap your portfolio all at once, those stocks can potentially grow helping offset the risk of outliving your savings."
For example, a $2 million portfolio comprising 60% stocks and 40% bonds and cash would be worth nearly $854,000 after 30 years, whereas a portfolio comprising 20% stocks and 80% bonds and cash would be depleted by year 29. (Both hypothetical investors took a 5% portfolio withdrawal in the first year of retirement, which was increased 2.3% annually thereafter to account for inflation.) A financial planner can help assess your specific needs and run different scenarios to determine how much and what type of stock exposure makes sense for your individual circumstances.
Your mix matters
Source: Schwab Center for Financial Research.
The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Both hypothetical investors took a 5% portfolio withdrawal in the first year of retirement, increased 2.3% annually thereafter to account for inflation. The 60/40 portfolio's performance assumes a 6% average annual return, and the 20/80 portfolio's performance assumes a 5% average annual return. Returns do not reflect expenses, fees, or taxes.
Risk: Insufficient liquidity
A steep market downturn can be particularly threatening in the first few years of retirement. If you tap your portfolio as it's losing value, you'll need to sell a greater proportion of investments to meet your income needs.
"Not only does that drain your savings more quickly," Susan says, "but it also leaves you with fewer assets to potentially generate returns when the market eventually recovers." If a decline occurs in your later years, on the other hand, your portfolio presumably would be smaller and, therefore, so would the hit.
Source: Schwab Center for Financial Research.
The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Both hypothetical investors had a starting balance of $2 million; a portfolio mix of 60% stocks and 40% bonds and cash; and experienced a –15% return in Year 1, a –15% return for Year 2, and a 6% return for every year thereafter. Investor 1 took a $100,000 withdrawal in Year 1 and increased subsequent withdrawals 2.3% annually to account for inflation. Investor 2 took no withdrawals in the first two years of retirement, a $104,652 withdrawal in Year 3, and increased subsequent withdrawals 2.3% annually to account for inflation. These scenarios do not reflect expenses, fees, or taxes.
Solution: Shore up your reserves
It's important to assess your ability to take on risk when preparing for retirement. Having adequate short-term reserves can help you avoid selling assets in a down market. "Most retirees should have at least a year's worth of expenses in a highly liquid account, such as an interest-bearing checking or savings account," Susan says, "plus an additional two to four years' worth of income set aside in stable, relatively liquid investments, such as short-term bonds or bond funds, which are fairly easy to draw upon and typically generate more income than cash and its equivalents."
Risk: Failing to plan for long-term care
Health care spending is top of mind for many soon-to-be retirees—and with good reason. A 2022 report from the Employee Benefit Research Institute estimates a 65-year-old couple could need as much as $383,000 in savings to have a 90% chance of covering their health care expenses in retirement—and that doesn't include an often-overlooked expense that nearly 70% of retirees will face at some point: long-term care.
"Medicare can help cover most health care costs in retirement, but unfortunately that's not the case when it comes to long-term care," Chris says. If you end up needing help with daily living activities, such as bathing and eating, you'll be on the hook for covering such services yourself—the cost of which can be exorbitant.
The annual cost of long-term care is formidable—and rising.
|Type of care
|Average annual cost
|Assisted living facility
|Home health aide
|Nursing home, semiprivate room
|Nursing home, private room
Solution: Consider long-term care insurance—ideally before age 65
The best time to buy a long-term care policy generally is between the ages of 50 and 65, after which premiums can skyrocket. In a 2022 report, for example, the average annual premiums for a healthy 65-year-old man and woman were $1,700 and $2,700, respectively. Premiums for a policy purchased at age 75 would be nearly double those figures, assuming coverage is even available (nearly half of all applicants in their 70s are rejected).
In our survey, respondents pointed to high premiums as the primary reason for eschewing long-term care insurance. While paying between $1,700 and $2,700 annually may seem costly, it pales in comparison to the average annual cost of a private room in a nursing home, which will run you some $108,000. "It's true that you may never end up tapping such a policy," Chris says, "but the downside of not having coverage can be considerable. You should take into account your family history, overall health, and financial situation when determining whether long-term care insurance is right for you."
Those who don't qualify for long-term care insurance due to a preexisting condition might consider maxing out contributions to a health savings account (HSA), if available, to help prepare for the potential financial hit of long-term care. Generally, contributions to an HSA are made with pretax dollars, money in the account can grow tax-free when invested, and withdrawals also are tax-free if used for qualified medical expenses. In 2024, savers ages 55 and older can contribute up to $5,150 as an individual or $9,300 as a family, which includes a $1,000 catch-up contribution.
"Even if you do qualify for a long-term care policy, maxing out your HSA also makes sense since you can use HSA funds to pay for long-term care insurance premiums," Chris says.
Don't go it alone
As with any period of uncertainty, navigating the dangerous decade successfully comes down to anticipating the risks and, to the extent possible, future-proofing your plan. A financial consultant can help you determine which obstacles you may face as you approach and enter retirement, and what steps you can take now to mitigate them. "Forewarned is forearmed," Susan says. "The earlier you create and pressure-test your retirement plan, the more successful it's likely to be."
Here for you
No two retirements are alike, which is why it's important to work with a professional who can help tailor your plan to your unique situation. Your Schwab financial consultant can help anticipate challenges and adjust your plan to meet your ever-changing needs, including:
- Refining your retirement vision
- Assessing your spending needs
- Estimating your future income
- Running simulations to see how your savings would fare in a variety of economic and market scenarios
Best of all, they're there for you every step of the way—from well before retirement to far beyond. Call today to schedule a complimentary portfolio review.
1Planning for Tomorrow, Charles Schwab, 10/2022.