4 Retirement Planning Pitfalls to AvoidDecember 17, 2016
Often, prospective clients come in to my office and ask me, “Can I retire?” Unfortunately, there is no magic age or value or equation that allows everything to work perfectly and can give them a straight answer to that question. There are lots of ways to find retirement success. What I am typically more concerned about are potential pitfalls in retirement. Fundamentally, my clients are, too. Here are my thoughts on why people miss the mark in retirement planning:
1. People don’t know their expenses.
I am regularly shocked by how little folks know about their own cash flow—I mean their current expenses, not to mention what their expenses could be in the future. Do you owe any money on a house, car or credit cards, and when will it be paid off? What expenses will go away when you retire, and will there be any new retirement expenses that start when you leave your job? One of the big questions we are asked about is how to budget for healthcare expenses. Unfortunately, there is no easy answer to that one. But generally, you have to have a good idea of how much outflow you will have each month. Whether a retiree needs $500 or $5,000 per month will make a huge difference in their lives and future plans.
2. People aren’t sure where their income is coming from.
Once you figure out your expenses, the next step is to figure out how you will pay for them. Most people will have some Social Security benefit, and many have a pension payment as well (although these are going away for most young people). If you are lucky enough that those two amounts cover your low expenses, then you may not need other income. But for many, more income will be necessary to cover your expenses. This may come from part-time work, dividends or interest from investments, other retirement accounts or guaranteed annuity payments, which are backed by the financial strength of the issuing insurer. Your needs and desires should dictate your mix of these income streams and should allow you to balance monthly income versus flexible money for one-time expenditures.
3. People retire from something rather than to something.
Retirement is one of the most stressful things that can happen in your life. Why is that? Upon retirement, most people who worked at the same place for their whole life leave behind not just their reason to get up in the morning, but much of their social structure. I have clients who have retired from companies after 35, 40, 45 years, and they have lived life with their coworkers for that long. Not only are those working hours hard to replace with different activities, but the friends (or at least being able to see them every day) are hard to replace also. You must know what you are going to do when you retire and how you are going to spend your time. Some may yearn for travel; others may just want to fish off their back porch. You must realize the hole that will be left in your life when you retire, and make plans to address it so that the transition is as smooth as possible.
4. People forget to consider their legacies.
They may consider what they will leave materially, but few go beyond that. It is normal, of course, to consider how those you will leave behind will be taken care of. A legacy is far more than that. How do you want to be remembered? What do you want people to say about you at your visitation? What will they say was important to you? After nearly 20 years in the financial services business, I’ve had a bunch of clients die, and none of them boasted beforehand, “I have no friends, but I have lots of money!” Think about your relationships, and do what you need to do today to make them flourish. Maybe even spend a little money to create some memories with those you care for. Give them something to talk about at your funeral.
Certainly, financials are top of mind for those who consider themselves successfully retired. Heeding points one and two will go a long way to helping avoid retirement pitfalls in that sense. Points three and four, though, make it clear that you have more to think about than just money to retire well. Preparing for all facets of retirement, fiscal and relational, is the best way to succeed.