Reaching retirement is one of life’s major milestones. After years of training and education, decades in the workforce, and diligently saving your money, you finally made it! You can look forward to enjoying your golden years of less stress, golf, and enjoying the good life. Right? Well, not so fast. Many people understand what they need to do to get them to this point, however, few people properly plan for the decumulation stage of their retirement. In fact, just a few missteps can derail one’s finances or disrupt their life. Below are mistakes that all soon-to-be retirees should avoid:
Failure to retire TO something: While employed full-time, folks tend to complain about tedious tasks such as commuting, meetings, difficult co-workers, and other activities. Yet, these activities, whether they are pleasant or not, provides folks with a daily structure. Unfortunately, many retirees find out within a few months into retirement, that there is a lot of time to kill when you are not working. While hobbies, dining out, and traveling as all worthwhile endeavors, none of them are full time pursuits.
In retirement, it’s imperative to determine a way to stay socially engaged, mentally sharp, physically active, retain a sense of purpose, and maintain structure in your day. There are many ways to do this which include part-time work, volunteering, participating in regular social groups, a combination of all these items, and much more. Failure to retire to a specific daily routine can lead to a more rapid mental and physical decline and lack of fulfillment.
Taking too much investment risk: The combination of having more time and sitting on a pool of assets, may tempt retirees to “play” the market or make various speculative investments. This is not the phase of life to take these risks, even if they are small. Gambling is addictive and the slope is slippery. A few lucky trades or imprudent deals that may work out can cause one to risk more capital, which may ultimately lead to wiping out a significant portion of one’s nest egg.
Retirement is a time to enjoy the fruits of your labor. It is not the time to risk your capital, when you have a harder time or not ability to earn it back. This necessitates taking proper precautions to protect your funds against both investment risk and inflation. At a minimum, all retirees should implement the following strategies within their plan, regardless of their level of wealth:
Implement a bond tent: A bond tent is a strategy that puts a few years of expense money into high quality short-term bonds or into cash equivalents in early retirement. This approach aims to reduce risk from market downturns that may be devastating while an investor begins withdrawing money from their portfolio.
Diversify: The market moves in cycles. No one knows what asset class will outperform, and which will plummet in value. This is why spreading your investments into multiple areas of the market is always prudent, especially when you are no longer earning an income to replenish your nest egg.
Maintain an allocation to equities: In today’s world, it is common for retirees to experience a multi-decade retirement. In order to maintain one’s standard of living while minimizing the probability of outliving one’s funds, having exposure to stocks is imperative. Gone are the days when folks put their entire portfolio in municipal bonds and lived off the interest payments. The market has changed and so has longevity expectations. Utilize stocks to plan accordingly.
Ignoring your safe withdrawal rate: Living on a fixed income necessitates having a prudent spending strategy. Failure to spend within your means while working may lead to living paycheck to paycheck or taking on debt. However, there is still hope of digging yourself out of such a predicament with by earning and growing your income. In retirement, overspending can lead to depleting your funds and the need to rely on family to support you. Needless to say, this is a precarious situation in which to find oneself.
In order to avoid running out of funds, it’s imperative to determine your safe withdrawal rate (SWR). One’s SWR is how much money they can spend on an annual basis without risking depleting their assets while they are still alive. While every family has different goals, a good rule of thumb is that one can spend approximately 4% annually of their assets in the early stages of retirement. This should allow your portfolio to continue to grow and which will help prepare you for the higher expenses in later retirement. The 4% rule should be just a starting point in your discussion with your advisor. Everyone’s SWR may be different based on their portfolio size, goals, age, and other factors.
Neglecting long-term-care and estate planning: Insurance and estate planning are generally the least popular elements of financial planning. They both involve contemplating one’s demise or incapacity. However, what is even less pleasant is the fiasco that will ensue if you don’t have those components of your life in order.
Taking the time to sit down with a competent attorney and insurance advisor who specializes in these issues is imperative. An attorney can draft the relevant documentation, such as a will, but also the appropriate documentation needed for when you are still alive, but need extra help. This includes a health care proxy, power of attorney, and trusts, if necessary. Tis planning will ensure that the client is provided for in the event of deteriorating health, as well as for the orderly disposition of their assets upon their death.
On the insurance front, while life and disability insurance may be less relevant, long-term care insurance is imperative. Afterall, about 70% of retirees have long-term care needs at some point in retirement. This is due to deteriorating mental or physical health. The cost of this care may range from $70,000 to nearly $130,000 a year depending on the type of care and what part of the country you reside in. Failure to plan for how to handle these expenses will have a devastating impact on your finances, as well as your family who will need to determine how to manage your care.
If long-term care insurance is not an option due to bad health or financial concerns, then other options should be discussed with your attorney, who may suggest Medicaid planning. The key with this type of planning is to plan for your estate and long-term care needs well before they may become relevant. This will allow you to seamlessly get the help you need without plundering your finances and burdening your family with unnecessary stress.
Every retirement is different: While no single vision of retirement is the same, these four common pitfalls apply to everyone. Each one can negatively alter the trajectory of one’s retirement. Taking the necessary steps to avoid these errors will minimize the financial and family related stress on what should otherwise be a rewarding period of life.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures.