I'm a Financial Adviser: This Is the Real Key to Enjoying Retirement With Confidence

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Retirement should mean freedom — travel, hobbies and family time. But many retirees also face constant worries about rising medical costs, market downturns, tax surprises and outliving their savings.

The reality is that retirement planning isn't "set it and forget it." A plan that works today might need to be adjusted in the future as tax laws, markets, your personal goals and your health status change.

The most confident retirees build flexible frameworks that cover income, health care, taxes and investments, and they review them regularly.

Here are five steps you can take to make your retirement plan resilient:

1. Secure your income foundation

Think of income planning as establishing the foundation for a house. If it isn't solid, nothing else stands firm. Retirement income often comes from a mix of fixed sources (Social Security, pensions and sometimes annuities) and variable sources (investment withdrawals, rental income, etc.).

If retirees don't coordinate income planning with other retirement planning areas, they could face sequence of returns risk, which is the danger that poor investment returns early in retirement, combined with withdrawals, can permanently damage a portfolio's ability to last through retirement.

Longevity also raises the stakes: A 65-year-old couple has a 50% chance that one spouse will live into their 90s.

Inventory every source. Chart Social Security, pensions, investments and other income with start dates and amounts, and note whether they are fixed or variable.

Cover essentials with guaranteed income sources. Housing, food and health care should be funded by reliable sources such as Social Security, pensions or annuities as much as possible. The more of your fixed expenses that are covered by secure income, the better the plan.

Stress-test scenarios. What if you live to 95? What if inflation rises more than expected? Stress-testing your retirement plan involves simulating various scenarios — including market downturns, high inflation and a health crisis — with software tools such as a Monte Carlo analysis to see how your plan holds up.

You want to identify how much you have in assets, how much you need for spending and determine the gap between your guaranteed income sources and your expenses. That's what you're trying to bridge.

Stay flexible. Make discretionary spending dependent on portfolio withdrawals that can be adjusted. The old general rule was a 4% withdrawal rate annually, but the better way to approach it is to put spending guardrails in place.

For example, if you have a sustained bull run in the market for three to five years and your account values are elevated, you can afford to move your guardrail, raising your withdrawal rate. But if the market dips substantially, it would be wise to trim your expenses.

However, you should find out the guardrail range to do so effectively for the long term.

2. Protect against health and long-term care risks

Health care is the biggest wild card in retirement. Fidelity estimates that the average 65-year-old couple will need $315,000 for health care — not including long-term care, in which staying in a nursing home now exceeds $100,000 annually.

Medicare doesn't cover everything. Most notably, it doesn't cover long-term care, which can wipe out savings meant for heirs or a surviving spouse.

To protect yourself from health and long-term care risks:

Audit your policies. Review Medicare choices, supplemental coverage, life insurance and long-term care protection.

Consider alternatives. Hybrid policies and long-term care riders might be more cost-effective than stand-alone long-term care insurance, but they might not cover all necessary care.

An example is a long-term care-focused life insurance policy allowing people to access their life insurance benefits while still alive through policy loans if they can't perform two of six daily living activities (the definition of long-term care).

These policies indirectly ensure other areas of the financial estate from being spent down, and the loan is paid off at death from the death benefit.

Plan for affordability. Build premiums and likely out-of-pocket costs into your retirement budget. Consider setting up a dedicated health care fund to cover unexpected medical costs.

Along with boosting your retirement savings to help account for health care costs, opening a health savings account (HSA) with your employer can be beneficial. Your contributions are made pretax, and your savings grow tax free.

You can withdraw money tax-free as long as it is used for qualified medical expenses, or it can be used like other tax-deferred balances (such as an IRA) after age 65, as needed, without penalty.

3. Minimize taxes

Taxes can eat into retirement income faster than many expect. Your Social Security benefits may be taxable up to 85%, required minimum distributions (RMDs) from retirement accounts (which begin at age 73 or 75 for most people) can push you into higher brackets (which can then impact Medicare costs) and your heirs might inherit tax headaches without proper planning.

Tax planning is one of the few ways to directly improve net income without taking more market risk.

Make a tax-planning checklist. Review whether Social Security benefits will be taxable, given other income sources. Check the state-level taxation of pensions and retirement income. Update estate documents to reflect current tax law.

Consider both sides of the Roth conversion equation. A Roth conversion moves funds from a pre-tax retirement account, such as a traditional IRA or 401(k) into a Roth IRA.

Although you pay taxes on the conversions, all future withdrawals in retirement will be tax-free (after age 59½ and as long as you've had the account for at least five years). Unlike traditional IRAs and 401(k)s, Roths aren't subject to RMDs during your lifetime.

The biggest drawback to a Roth conversion is the immediate tax liability. A large conversion could push you into a higher tax bracket for the year, so making a series of smaller conversions over multiple years may be a better option for some people.

Also, consider the question of tax liability catch-up: Do you have enough time for the Roth conversions to recover your tax liabilities paid through earnings, especially if you'll need the funds for retirement instead of leaving them to heirs?

Plan for heirs. Estate planning through trusts, gifting strategies or charitable giving can reduce beneficiaries' tax exposure.

A charitable remainder trust (CRT), for example, can provide an income stream to your beneficiaries for a set period, then the remaining assets go to a qualified charity. This strategy is useful for larger retirement accounts.

The tax-free withdrawal of Roths also benefits your beneficiaries, as does a properly designed life insurance strategy, providing them with a tax-free death benefit.

4. Manage investment risk wisely

The portfolio that suited you in your 40s won't necessarily fit you in your 70s. Retirees often tilt too aggressively (chasing gains) or too conservatively (sitting on cash that loses to inflation).

Volatility can devastate retirees when they're withdrawing income from their accounts, but if you're overly cautious, you risk losing purchasing power.

To manage investment risk:

Assess your true risk tolerance. Use a risk questionnaire or adviser tool. Ask questions such as: If your portfolio dropped 20% in a short period, would you feel anxious, panic and sell, or would you see the moment as a buying opportunity?

Most important, evaluate how much risk you need to make your plan work. Just because you're comfortable with risk personally doesn't mean it's necessary in your retirement plan.

Ask what your plan can afford to lose without jeopardizing your financial goals, then put guardrails in place.

Rebalance, diversify and have an exit strategy. Don't let a bull market deceive you. The fear of missing out often leads many to expose their portfolios to disproportionate risk, ignoring unexpected market reversals that no one can see coming.

Diversification should be smart. That is, focus on areas of the market that show sustained profit potential, not a shotgun approach of picking 12 random areas and hoping winners outweigh losers. This means a more active approach to where you put your investments.

Finally, just because U.S. markets have always recovered and risen historically does not guarantee that they always will, so have an exit/hedge strategy, not a fear strategy.

During a sizable dip in the stock market or a crash, having predesigned risk-reduction strategies and hedging is how institutions make money and why retail investors typically get clobbered.

Keep liquidity. To the extent that your financial plan can accommodate it, maintain one to two years of expenses in cash or short-term investments to avoid selling assets at a loss during market lows (unless doing so creates some tax efficiencies).

Conversely, this could also allow you to capitalize on rare investment opportunities at low prices resulting from a market downturn.

Those could include anything from buying real estate at a reduced price to investing in new companies with significant growth potential.

Ultimately, maintaining sufficient liquidity provides you with financial options. There's a reason Warren Buffett is sitting on so much cash as of the time of this writing.

5. Keep the plan dynamic

The best retirement plan isn't perfect on paper — it's resilient in real life. A rigid plan can break under pressure. Flexibility allows you to adapt without panic. Schedule annual reviews. Revisit income, investments, taxes, insurance and estate plans yearly. Run what-if scenarios.

You can't predict the future, but you can prepare for it. A resilient retirement plan is adaptable and regularly updated.

That's the real key to enjoying retirement with confidence: Knowing your plan can bend without breaking, no matter what life throws your way.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.