Retirement

Financial Stress: How Do You Deal with It?

By Chris Duderstadt

October 30, 2023

Financial Stress: How Do You Deal with It?

Key Points – When Is It Time to Retire?

  • Are You Worried About Outliving Your Money?
  • Not Giving into Fear and Greed When Dealing with Financial Stress
  • Examples of Unexpected Expenses That Can Cause Financial Stress
  • Different Types of Debt to Deal with
  • 8 Minutes to Read

Revisiting Modern Wealth’s Mission Statement

At Modern Wealth Management, we’re committed to building personalized financial plans that can give people more confidence that they’re doing the right things with their money, freedom from financial stress, and more time to spend doing the things they love. Today, we really want to focus on the financial stress part of our mission statement. What is financial stress and how do you deal with it?

Those are two questions that have a wide variety of answers. The bottom line is that it’s critical to have a comprehensive financial plan that helps you mitigate the various things that give you financial stress. Let’s review some examples of financial stress and how to deal with them within a financial plan.

1. Financial Stress About Running Out of Money in Retirement

It’s a huge goal to get to retirement. That’s a big goal that everyone should have, but that’s not the full picture when it comes to planning for retirement. You need to have a plan that takes you to AND through retirement.

No longer needing to work the rest of your life can take a lot of stress off your shoulders in several aspects. It’s exciting that you can finally wake up every day and do the things you want to do rather than going to work.

However, retirement can suddenly become a very stressful time if you didn’t thoroughly plan for it. You’re no longer getting a paycheck and need your hard-earned money finally start working for you. That financial stress can be prevented by saving early for retirement and fully understanding where you’re saving to.

Having a plan that takes you through retirement is crucial with mitigating longevity risk. We all want to live long, happy, and healthy lives. If you plan to have enough income to live until you’re 80 but end up living until your 90, financial stress can quickly mount. And that financial stress won’t just be limited to you. We’ll explain shortly how it can impact your entire family.

How much you need to save for retirement depends on your specific needs, wants, and wishes for retirement. What are your goals? What are your expected expenses? And are you planning for unexpected expenses? We’re going to address some examples of unexpected expenses throughout the article, as they can be some of the main contributors of financial stress.

2. Financial Stress from the Markets and the Economy

One of the primary sources of financial stress, especially for retirees, are market downturns. Retirees don’t have that paycheck to lean on anymore when those happen. That’s why we can’t stress enough how important it is to understand your income sources in retirement. Retirement is all about cash flow.

No matter how well-versed you are with investing, your retirement is way too important to do guess work by trying to time the markets. Acting upon fear when the markets are down or greed when the markets are up can quickly derail your retirement.

Remember that your investments are intended to serve as the engine of your financial plan. An investment plan and a financial plan aren’t one in the same. Your investment plan involves figuring out your proper asset allocation and rebalancing as various factors in your life change, especially when it comes to your goals and your desired level of risk. It’s imperative to understand sequence of returns risk so that you’re maximizing your returns. Your financial plan includes your investment plan, but also should include a forward-looking tax plan and insurance and estate planning needs.

3. Financial Stress from Your Family Members

Speaking of estate planning needs, that brings us to another source of financial stress: your family. No matter how much you love your family (or your family loves you), there are many ways in which you can cause each other financial stress. We wish nothing but the best for your children as well, but what if they suddenly need financial assistance? That can certainly bring about a lot of financial stress for the whole family. Do you have money that’s set aside for various emergency scenarios?

And let’s go back to that example of planning to live until you’re 80 but you end up living into your 90s. That can put a lot of financial stress on your children and/or spouse. And that could come at a time when your kids are planning for retirement. That’s an example of an unexpected expense for them.

Maximizing Your Social Security Benefits

Playing the long game with income planning is crucial in retirement. One trap that we’ve seen people fall into is claiming Social Security when they’re immediately eligible at 62. We understand that there can be unique cases where that could be necessary, but oftentimes, people that do that are just claiming it so they can get their benefit ASAP. Those people usually won’t think about their spouse, and that’s critical to do when claiming Social Security.

By delaying when you claim Social Security, you’re maximizing your benefit. That’s not just important to you; it’s important to your spouse as well. Remember that when you or your spouse dies, the surviving spouse only gets to keep the highest of your two benefits.

How to Build Generational Wealth

Again, hopefully you and your spouse live long, happy, and healthy lives, and have a solid plan that takes you to and through retirement. Getting through retirement is actually the bare minimum for a lot of people, though. That’s because leaving a legacy is very important to them. Have you thought about how to give the most money to your heirs in the most tax-efficient way possible?

This ties back into the importance of understanding where you save to. It surprises a lot of people that traditional IRAs are no longer a good wealth transfer vehicle thanks to the SECURE Act. That money will need to be taken out within a 10-year period and, if you’re inheriting from your parents, you’re usually inheriting it during your peak earning years. When you inherit a traditional, you’re taxed on the distribution.

However, with a Roth IRA, the beneficiary won’t be taxed since the tax would have already been paid by the original account owner. There can be unintended consequences of Roth conversions for the original account owner, though, such as being thrown into a higher Medicare bracket. There is a lot to consider in the Roth vs. traditional decision, so make sure that you’re consulting a tax professional when you’re doing that.

Having a Detailed Estate Plan

Another thing that can lead to financial stress for your loved ones is not having an up-to-date estate plan. It’s critical to update your beneficiaries after major life events and to review your estate plan annually with your heirs so that there are no surprises about who is inheriting what after you’re gone.

Also, it’s important to realize that if you only have a will, your estate will automatically go through probate. You’ll need a trust if you want your estate to bypass probate. Having a trust is more expensive than just having a will because of the legal assistance required to establish it. It’s yet another example of how financial planning is full of trade-offs.

4. Financial Stress from Having Too Much Debt

This is one of the more obvious reasons for why someone can have financial stress. Americans surpassed $1 trillion in credit card debt in August. That’s quite a bit of financial stress for our nation. Credit card debt is not something that you want to take with you into retirement.

But not all debt is bad debt. Take your mortgage for example. The interest rate on your mortgage is at a fixed rate. So, if you had a low interest rate on your house and don’t have much left to pay on your mortgage, there’s no real rush to pay it off. We’ll dive more into interest rates and inflation being sources of financial stress momentarily when we discuss financial stress that comes from other unknowns.

Having a budget is pivotal so that you make sure that you don’t overspend and get into too much debt. The thought of having a budget in retirement doesn’t sit well with a lot of people, but it remains necessary to avoid financial stress. Think of it as creating a spending plan that covers your needs, wants, and wishes like we mentioned earlier. Your spending plan is a pivotal component of your overall financial plan.

5. Financial Stress from Other Unknowns

It was nice when interest rates and inflation were both substantially lower than what they’ve been for the past year and a half or so, wasn’t it? There are quite a few people who have been blamed for that no longer being the case and even more people who are doing the finger-pointing. Government policy is certainly a financial stressor in its own right, but we’re not going to go down that path. Just remember, if you don’t like a certain policy/politician, the best way to deal with it is by exercising your right to vote.

While high interest rates and high inflation haven’t been easy to deal with, they are both things that can be planned for. It’s easy to see now that applying a 1% or even a 2% inflation factor across your plan could lead to a lot of financial stress when inflation soars.

That’s why when we’re building financial plans, we use a 4% inflation factor for everyday expenses and about a 6.5% inflation factor for health care costs (guess what our last financial stressor is on our list). Those calculations are based on the history of inflation rates. This isn’t the first time we’ve had inflation at the levels they’ve been at, and don’t expect it to be the last. When you’re building your financial plan, make sure that your financial advisor is stress testing for the possibility of high inflation, high interest rates, and other factors that are out of our control.

6. Financial Stress from High Health Care Expenses

And of the last financial stressor on our list, we have health care expenses. We’ve said time and time again that taxes and health care are the two biggest wealth-eroding factors in retirement. They’re at the root of financial stress for a lot of people.

We discussed the possibility of outliving your money earlier, but unfortunately, it’s more common for people to have unexpected health complications—that can potentially be fatal—before or early on in retirement. We hope that doesn’t happen to you or your spouse but remember that the impact isn’t just on that one person. The healthy/surviving spouse or their children are going to face the financial stress that comes with the financial stress of those unexpected expenses.

Have you considered long-term care insurance? Or maybe life insurance is something you want to carry into retirement? Those types of decisions can’t just be made on a whim. They need to be thoroughly thought through as you ponder you and your spouse’s unique situation.

The Key to a Stress-Free Retirement

Obviously, there are other sources of stress in our lives besides financial stress. Work can cause a lot of stress, but some people choose to keep working because the financial stress they feel is greater than the stress of working. Therefore, they choose to wait until reaching Medicare age (65) to retire.

Oftentimes, though, the people who feel that financial stress don’t actually have as much of it as they think. That’s because they haven’t put together a financial plan that can give them more confidence that they’re doing the right things with their money, freedom from financial stress, and time to spend doing the things that they love. Having a financial plan is the key to a stress-free retirement.

That’s exactly what we want for you. If you’re feeling financial stress, do you have a financial plan? And if you do have a financial plan, is it effectively helping you satisfy your needs, wants, and wishes? Start a conversation with us to begin building a plan that gives you the clarity and confidence that’s needed to get to and through retirement.

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Financial stress feels different for everyone. Let’s build a plan that’s designed specifically to you and your spouse so that whatever financial stress you might be feeling is lifted off your shoulders.

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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.