Top 10 Retirement Tips for 2023

It is difficult enough to retire in a bearish market. The 2023 retirement outlook is not only challenging but also includes rising interest rates and high inflation. These trends, taken together, have created an uneasy environment that could be troubling even the most cautious retirement planners.

“Retirement into a bear market makes it more likely that you’ll run out of money over long-term,” Liz Weston, CSS0_, financial columnist and author of “The 10 Commandments of Money,” says.

The current conditions make 2023 one of the most difficult years for retirement since the Great Recession. A little perspective may be helpful. Despite being down 17% over the year, the S&P 500 has risen 10% since 2020 and about 50% in the last five years.

Your personal circumstances are the most important. If you plan to ride into the sunset in 2023, here are some things to be aware of.

Understanding Sequence of Returns Risk

Sequence risk of returns is a fancy term financial advisors have been using for years, well since 1994, when it was introduced by William Bengen in a seminal paper.

This may sound like an obscure financial theory. It’s crucial to understand this unique category of risk in 2023. It directly affects the wealth of those who are planning to retire in the current difficult market.

Let’s simplify it: There will be at most one bear market during your 25-year retirement. If the slump happens at the beginning of retirement, rather than at the middle or end, your finances will be far worse.

It’s a mirror of your financial situation and a sign that you are better off if retirement savings begin early. You can get more time for your money to enjoy compounding returns if you start investing earlier. If you take money out of retirement investments during a bear market, you will lose your principal and forever reduce your ability to reap the benefits of compounding growth.

Charles Schwab illustrates the sequence of returns risks in this manner. Imagine two retirees starting with $1 million for their retirement portfolio. Each one of them takes out $50,000 annually for expenses. Investor A experiences a 15% decline in the market during their first year of retirement and runs out of cash within 18 years. Investor B experiences a 15% decline in the market at 10 years of retirement. However, they still have $400,000 at 18 years of retirement.

It is not easy to reduce the risk of a return sequence. It is important to reduce principal withdrawals in a market downturn, especially early retirement.

Getting rid of your fear of inflation

is the most frightening thing for retirees. Rapid declines in the value of your retirement dollars can ruin even the best-laid plans.

Americans are aware of the 40-year highs in U.S. inflation. A recent BMO Real Financial Progress Index survey found that 25% of Americans believe high inflation will make it harder to retire.

However, not all inflation is equal. For example, the consumer price index ( ) attempts to capture all U.S. consumers’ activity. But that’s not you.

Many people find that the cost of fuel, eggs, and bread has a significant impact on their monthly finances. Others, such as retirees who don’t drive as much and are no longer able to feed a family of five, may feel less affected by rising prices.

Retired Americans need to be more concerned about the rise in healthcare costs and local property taxes. It is important to not let emotions about the inflation situation influence real-world financial decisions.

Financial advisors and consumers often use a 2% to 3% annual inflation rate to model how your budget will change over the 25-year period of retirement. The average CPI inflation rate will not likely be lower than 7% or 8.8% by 2050, but it won’t be as low as 2%.

Do not delay starting social security

Discussing the above two points should include a close examination of your plans for Social Security.

Weston says that Social Security is guaranteed income that has been adjusted for inflation. This makes it extremely valuable. The cost-of-living adjustment ( COLA ) for 2023 was 8.7%. This shows how the program can help with rising inflation.

Weston states that a key rule of thumb in Social Security is to delay taking benefits, especially when there is high inflation.

Retirees today have a chance to live beyond the break-even point. This is where the bigger checks you receive if you delay starting benefits more than the smaller checks that you lose in your mid-60s and early 60s.

The second part of this plan is: Before you start Social Security benefits, tap other sources of retirement income such as your 401(k), or individual retirement account ( IRR).

Rethink where you want to live

The housing market is experiencing major changes. Prices in many once-hot housing areas are falling as mortgage rates rise.

However, many areas remain too costly for retirees. These changes may outlast the current market downturn. So take another look at where your retirement plans are and maybe reconsider where you want to spend your golden years.

What is your Health Care Gameplan

Americans can enroll in Medicare as soon as they turn 65. Failure to do so could result in penalties. Plan to enroll in Medicare in the months before your 65th birthday to give yourself coverage time.

Medicare enrollment is just the beginning of your retirement plan.

Fidelity estimates that an average American couple will spend $315,000 for other health care costs such as copays and additional premiums during retirement. This is up from $300,000.

You will need to get your own health insurance if you have to retire earlier than 65. Can COBRA provide a bridge? What about the Affordable Healthcare Act (ACA). Is your company offering any type of retirement health coverage? Get a plan in place now to avoid being forced to make these decisions.

Prepare to Retire Early

The Employee Benefit Research Institute has found consistently that a large percentage of American retirees are leaving the workforce sooner than expected.

This is not necessarily a bad thing. About a third of respondents say they can afford early retirement. Another third of those surveyed by EBRI said they had to leave due to a health issue, while a quarter stated that they were forced into early retirement because their employers forbade them.

A small, but significant, percentage of people who retire are unable to care for their partner or adult children. Nearly 30% of the population expects to continue working until age 70. Only 7% of those who make it this far are actually able to.

Remember that people don’t always have realistic expectations about when retirement will happen. Even if you don’t plan on retiring soon, it is important to start planning for retirement.