For most people, success in retirement requires balance. You are trying to live comfortably and enjoy life, while at the same time, conserving your precious, financial resources. Keep in mind that your financial resources must last for at least, one day longer than you do. Hoping for the best but, planning for the worst is your key to avoiding late life disappointment.
Whether you are in mid-career or just about to enter the golden gates of retirement, you would do well to think long and hard about some of the rose-colored assumptions you are making that may turn out to be dangerous illusions. Following those illusions can lead you into painful traps that can wreak havoc on your retirement dream.
The following are five of the most common illusions that I have seen people follow while planning for retirement:
- "I'm going to work until I'm 70." Planning to work too long. While many plan to work into their 70's, most unfortunately do not. The average retirement age is between 63 and 65. That includes workers who had planned to remain in the workforce until age 70. The longer you plan to work, the less your plan will require you to save. That's not being conservative. That's being aggressive. You would be surprised at the negative impact on your retirement projections if you retire just a few years earlier than expected. As part of your planning process you should conduct a sensitivity analysis that will measure the impact of retiring early.
- "I know when to get out of the market." Taking too much risk with your retirement assets. On average, major stock market declines are three-year events from start to recovery. That's just the average. Some last longer than that. If you could have stayed the course for five years you would have weathered every major market decline since the Great Depression. Unfortunately, you cannot ride out the storm if you are only one year away from retirement. Take note, if the money you have in the stock market cannot stay there for 5 years, it should not be there. In my 30 years of experience working with clients, advisors, and so called "market gurus" from all over the world, guess how many people I have met that were able to successfully time the market. That's correct, zero. Set and follow strict asset allocation guidelines to protect your capital from major market declines.
- "Prices are falling for most things. Inflation isn't a big deal." Failing to accurately consider the effects of inflation on your purchasing power over time. Yes, prices are falling for things like smart phones, televisions, laptops, and packages from Amazon. However, the things that can devastate a retiree's budget like, groceries, utilities, and medical care are climbing faster than the general rate of inflation. You must incorporate a realistic inflation rate into your plan otherwise you may run out of money.
- "I love this old house." This old house may expose you to unexpected maintenance costs during retirement. I wish I had a dollar for every budget I reviewed with no line item for "Home Maintenance". This old house could be a major source of pain if you have to start shelling out your retirement dollars for home maintenance bills. Many retirees use retirement as a time to downsize and economize into a new condo or townhouse that will hopefully be relatively maintenance free for 20 years.
- "I don't need to worry about end of life stuff right now." Not having your "end-of-life" paperwork (Estate Planning Documents) in order. Procrastination is an asset killer. I always tell my clients that the best time to prepare your will, powers of attorney, trusts, and end of life instructions, is when the sun is shining brightly. Take note, those dark clouds on the horizon can get here sooner than you think. It is very expensive to get guardianship declared after you or your spouse is already incompetent. Medicade has a five-year look-back period that can devastate your savings. A good "Trust and Estates" or Elder Attorney can help you work through the relevant issues before it is too late to do these things inexpensively if at all.
As a personal financial counselor for almost 30 years. I have, unfortunately, seen firsthand the results of faulty assumptions. Even the best financial planning software is only as good as the quality of your assumptions. As the saying goes, "garbage in garbage out". In planning, overly optimistic assumptions can turn your retirement dream into a nightmare. Take the time to think things through. Be conservative in your assumptions. Get an experienced practitioner to look over your shoulder and ask the tough questions. Remember, you get the retirement you can afford not necessarily the one you dream about.
I specialize in both the art and science of building wealth for retirement. As with any journey, building wealth for retirement begins with a workable plan and then disciplined execution over time.
Keith Donnell is a Certified Financial Planner Professional with 30 years of experience helping people effectively build wealth for retirement.