You Need a Retirement Contingency Plan: Five Steps to Get It Done

There’s a lot of fear surrounding financial security in retirement. Many worry they won’t be able to afford to stop working, while others say they have no money saved for retirement.

A report from AARP found 20% of adults 50 and older have no retirement savings, and 61% are worried they won’t have enough saved to support themselves. Meanwhile, 7 out of 10 say they’re worried prices will rise faster than their income.

Imagining all the what-ifs in retirement can be paralyzing. Financially planning for the unknown sounds nearly impossible, but it doesn’t have to be. Creating a thorough financial contingency plan can help you prepare for the unexpected, minimizing your risk of financial loss and instability.

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At its core, a financial contingency plan ensures your retirement savings can withstand various risks. This includes preparing for inflation, health care and medical expenses, the future of Social Security, longevity and even the death of a spouse. With so much at stake, how can you ensure your financial plan accounts for everything? The key is to break it down and attack each component one step at a time.

1. Establish an emergency fund.

You’ve likely heard the importance of establishing an emergency fund, but data shows a lot of people are lacking one. A recent Bankrate survey found more than 1 in 4 people say they have no emergency savings. Meanwhile, nearly 59% of U.S. adults say they’re uncomfortable with their level of emergency savings. Regardless of where you fall, the important thing is to establish one and contribute to it regularly.

Money contributed to the emergency savings account should be used to cover any unexpected costs from medical emergencies, home and car maintenance repairs, even the sudden loss of income. A good rule of thumb is to ensure you’ve got at least three to six months’ worth of living expenses saved in the account at all times.

2. Maintain a diversified investment portfolio.

The next component of your financial contingency plan should focus specifically on creating and maintaining a diversified investment portfolio. The key here is to balance your asset allocations to manage risk. This goes beyond investing in stocks and bonds. Investing in mutual funds, ETFs and real estate can help bolster your portfolio. Putting money into a high-yield savings account and opening an IRA is also helpful. But it’s not enough to diversify your investments — you must rebalance those allocations as time passes. This will help you manage risk and mitigate financial loss.

3. Prepare for health care costs.

Planning for health care is a particularly stressful aspect of retirement planning — especially with today’s life expectancy rates. On average, people are living longer now than they used to. According to the CDC, the average life expectancy for men is just under 75. For women, that number jumps to 80.

Unfortunately, the risk of illnesses and health conditions increases as we get older. Medicare is a helpful option, but it also might be a good idea to purchase long-term care insurance. This can help cover the costs of in-home care, as well as nursing home and assisted living facility stays.

Annuities with long-term care benefits may also be another option. Consider meeting with a financial adviser to review options that are best suited for you.

And don’t underestimate the power of a healthy lifestyle. Making the effort to be proactive about your health in the present can help you save hard-earned dollars in the future.

4. Create more than one income stream.

Establishing multiple streams of income is your next area of focus. Unfortunately, many jobs are doing away with pensions, and the future of Social Security is always hanging in the balance, mostly for those who are decades from retirement. Nevertheless, it’s not a good idea to rely on one income stream. This is where your investments become even more important.

Consider owning rental property, investing in CDs, working a side hustle or even creating online courses. A nice mix of various income strategies can help you maximize your earning potential, possibly allowing you to continue generating wealth well into retirement.

5. Be sure to account for inflation.

As you’re building your financial contingency plan, it can be easy to forget about adjusting for inflation. However, not accounting for inflation can financially hurt you down the road. Make investments that typically outpace inflation, such as equities and real estate. Inflation-protected bonds might also be another good option.

If you’re planning to receive a pension or purchase an annuity, see if they include cost of living adjustments (COLAs).

Finally, avoid holding on to too much cash. In periods of high inflation, your buying power decreases. So make sure you’re spreading your wealth and reevaluating your portfolio when inflation is on the rise.

Planning for the future can feel overwhelming at any phase of life — especially when it comes to retirement. However, breaking your plan down into these various categories can make it more manageable. Each step can allow you to focus on a specific area and plan accordingly. A financial adviser can help you figure out where to start, providing you with strategies that are best suited to your goals and financial situation.

These independent views and opinions are those of Joel Russo and are not necessarily the opinions of CoreCap Investments. Securities sold through CoreCap Investments, LLC, a registered broker-dealer and member FINRA/SIPC.