Retirement is a balancing act. It’s like a person walking on top of a wall. On one side is a cliff with a pool full of sharks. On the other side is a white sandy beach surrounded by blue water and a cabana set up waiting for you with a tall glass of lemonade. If you make a big mistake with your money in retirement, you can find yourself being eaten alive. If you are wise with your money, you can find more comfort and relaxation. Below are six critical mistakes that have the potential to devastate a retirement plan.
Lack of communication
You need to communicate your expectations for retirement and what it looks like. Discuss how much money you will need in order to accomplish all of the activities you want to do: travel, home remodeling, etc. Know what money is intended for major expenses and what money is intended for monthly living expenses. If you spend too much on large one-time expenses, you may seriously jeopardize your monthly income.
No measuring stick
Many retirees have no way of knowing if their money will last through retirement. In part, this is because they are not using a measuring stick. As a general rule of thumb, you should not spend more than 4 percent of your retirement assets per year. Another good benchmark is a 4-year checkup. After 4 years of retirement, if you have more money than what you started with, you should be on the right track. At Smedley Financial we use an elegant system that tracks yearly progress and lets you know whether you are going to outlive your money.
No spending plan
Too many people spend more than they should and don’t realize it until it is too late. Once they realize the mistake, they have to dramatically change their lifestyle. You should create and live by a monthly spending plan. When looking at potential expenses, evaluate how they will affect your goals. For example, helping out children can be one of your goals, but it might compete with your needs for security and independence. It is usually the hard decisions like this that seriously harm a retirement plan. With children, set clear and simple boundaries. Explain that you are taking care of yourself so they won’t have to.
Many people believe that at retirement they should put their money in the bank. Others feel they need to make up for lost time and invest aggressively. Both approaches have problems. Conservative investors often underestimate the negative impact of inflation over time. You may be in retirement for 30 or 40 years. Conversely, overly aggressive investors may lose their shirts as evidenced by the recession of 2008-2009. To address these issues, take a balanced approach that doesn’t have you investing at the extremes.
No plan B
Most people assume that bad things happen to others. We realize bad things can happen to us as well, but often act as if we are willing to play the odds that it won’t. Consider this sobering fact: at age 65, a typical married couple in good health can expect to spend $260,000 on healthcare costs during their remaining lifetimes. Have a plan B in place to cover unforeseen expenses like long-term care costs, medical expenses, and home repairs that are not covered by insurance.
Falling for a scam
As always, if it seems “too good to be true” it probably is. On April 30, 2014, the Securities and Exchange Commission (SEC) halted an IRA scam in Utah that cost investors $22 million. The company had been “paying” 12 percent on paper, but when investors tried to get their money back they were given the runaround. As with most scams, it is unlikely they will recover their money. Look out for red flags. Don’t jump in just because somebody promises great returns. Look for a track record for the product and for the company. Even if the investment seems like it is on the up-and-up, it may be a good practice to dip your toe in the water before you jump in with both feet.
Retirees get into financial trouble in dozens of ways. If you feel like you are being eaten by sharks, don’t despair. Seek out a trusted professional at Smedley Financial to help get you back on track. If you have managed to avoid these six common mistakes, give yourself a pat on the back, sit down in your private cabana looking at the crystal blue water, sip some lemonade, and enjoy the beauty of retirement.
- Center for Retirement Research at Boston College, “What is the Distribution of Lifetime Health Care Costs at age 65?” March 2010