Why Retirement Checkups Are the New Annual Physical

Traditionally, retirement plans involved a set-it-and-forget-it mentality. On the accumulation end, retirement savers would have a set amount deposited each month automatically. And once disbursement started, an amount designed to provide a reliable income for the average retirement age arrived in the retiree’s bank account each month.

Some events could trigger the need to revisit retirement strategies, such as unanticipated personal expenses or untimely movements in investment markets. For the most part, however, retirement plans were adopted because they required little work from retirees who were counting on what their plans would produce to fund their retirement spending.

But times have changed, as anyone who keeps an eye on financial news can tell you. Inflation has become persistent, which causes problems on both sides of the retirement equation. Those putting money away need to be more creative in finding funds to deposit. And those spending need to be careful that higher costs don’t cause them to exhaust their funds while they still have years (if not decades) of life left in front of them.

Market volatility has also become more persistent. Investors are seeing more ups and downs than in the past, meaning retirees need to be more careful with the timing they choose for shifting from accumulation to disbursement.

Additionally, fears are growing around the possibility that Social Security may not continue to be the reliable source of funds it has been in the past. For retirees, this means tracking the news, addressing shifting percentages, and possibly even rethinking when they transition into retirement.

These and other factors have ushered in a new age in which retirement checkups, just like medical checkups, are an event that retirees and those gearing up for retirement should schedule annually.

Embracing the need for strategy updates post-retirement

Several factors contribute to retirees being reluctant to revisit their strategies post-retirement. The lingering set-it-and-forget mentality is one of those factors. Many retirees feel they have diligently stuck to their strategy during the accumulation phase and expect they will be well provided for by their plan as a retiree.

Retirees may also suffer from overconfidence, causing them to ignore the financial complexities that arise after retirement. For example, retirees who arrive at the age where they must begin taking required minimum distributions (RMDs) from their retirement accounts could be making decisions based on an outdated understanding. A retirement checkup will help them to assess how the rules may have changed and identify new factors that strategies should consider.

Because retirement strategies are typically set up to maximize tax efficiency, changes to the tax code are another complexity that can significantly impact the long-term effectiveness of those strategies. Annual checkups allow planners to consider the effects of changes in the law, create opportunities to look for any changes being considered, and assess how to best prepare for them.

Using “stress tests” to identify weaknesses in financial strategies

When circumstances lead to concerns about physical conditions, stress tests are often prescribed to determine if concerns are well-founded. For example, chest pains or shortness of breath might lead to a stress test targeting the possibility of coronary artery disease.

Just like with physical conditions, stress tests can be used to determine if concerns about financial health are well-founded by using simulations or analyses that introduce adverse financial scenarios or unpredictable life events to retirement strategies. The goal of the tests is to reveal whether or not plans will be resilient to the events or if changes will need to be made if such conditions materialize.

Stress testing is particularly helpful for assessing sequence of return risk. It can explore the negative side effects of entering retirement during a down market and alert the retiree to strategic shifts they may need to make to minimize long-term losses.

Essentially, stress testing poses the “what if” questions that keep retirees up at night. What if the stock market sees a significant decline like the one that occurred during the Great Recession? What if inflation keeps going up? What if I live 10 years longer than the statistics show I should? Exploring those questions as part of an annual retirement checkup allows simulations to leverage the latest stats and include the retirement investor’s up-to-date goals and concerns.

Studies show that a high percentage of both retirement planners and those who have entered retirement have fears about outliving their retirement savings. A recent survey revealed that 64 percent of Americans worry more about running out of money in retirement than they do about dying. Financial stress tests can help to alleviate fears, either revealing they are unfounded or triggering changes that can lead to a healthier long-term financial situation.

Taking steps to address retirement risks

For many, the first few years after leaving the workforce are “the retirement honeymoon.” It’s a season of spending time with family, traveling, and investing in other personal interests that were neglected during the career years.

However, as time passes, the risks unique to the retirement years become more evident. An annual retirement checkup helps make sure those risks are acknowledged and addressed.

For example, long-term care costs are a financial risk that many retirees must ultimately face. Today’s retirees are living longer than past generations. They generally have worse health, and the economy is forcing their children, who have historically provided care, to spend more time working. Consequently, retirees must regularly assess their health care needs, the costs associated with meeting those needs, and how strategies may need to be shifted to ensure funds are available.

Estate planning may also need to be explored once the retirement honeymoon comes to an end. Annual checkups can be used to ensure planning considers the most recent tax laws and any changes, market movements, or personal developments that may impact estate values.

Medical doctors recommend annual physical checkups to empower prevention, early detection, and the proper management of the unique health challenges that come with aging. Financial checkups empower the same results, allowing retirees to detect early on when developments will negatively impact their finances and shift their strategies to prevent long-term losses