// You’re Retired? Don’t Make These Common Mistakes //
By: Taylor Haney
In my nearly 10 years in the investment and financial planning industry, I’ve seen my fair share of retirement mistakes. We’re all aware of the mistakes people make when planning for retirement – not saving enough, missing your employer match, bad investment timing of markets – but, what about those made in retirement?
Having recently talked someone off the cliff, I thought it might be nice to share and reflect on a few mistakes or decisions that I see time and time again. Here are the most common mistakes I’ve seen people make:
1) Letting your dream home become a nightmare – this is a big one. I see this one all the time. You’ve made it! It’s time to buy that home you’ve always wanted. You can now have big family get-togethers and entertain the grandkids for days! Buying a home that you can entertain family with, or splurging on that 10 years overdue kitchen remodel is all fine and dandy, but can you afford it? Let me be clear: there is nothing wrong with wanting to have a nice home, but I’ve seen retirements ruined when proper plans were not made. Assess your personal financial situation. Think about what’s most important to you. Do you like to travel? Do you like to host your family (do they live close or will they actually visit)? I have seen friend’s parents buy a beautiful house on the lake, and no one visited. Unfortunately, they had to sell the home after several years….at a terrible time. They took a substantial loss on the home and have made serious lifestyle adjustments ever since. If you plan to travel, or make other large purchases, you need to determine the feasibility of upgrading your home. Proper cash flow planning and determining access to credit can help you make the right decision. In truth, most financial decisions cannot be solved with just spreadsheets. You need to take a serious look at the lifestyle you want to live.
2) Paying off all your debt may cost more than you thought – probably the first question I get from any potential client who is close to retirement is: Should we pay off our house, cars, etc.…? There are times when paying off your house or other debts makes tons of financial sense, but being debt free does not free you from the burden of inflation, medical costs, taxes, and lifestyle expenses. I’ve met with many potential clients who were so dead set on paying off their debts, that they didn’t want to discuss the matter. Many clients of mine have paid off debt in retirement, but it made financial sense to do so. Here’s what I see happen: Jack and Jill retire. They have $500,000 in retirement accounts. They owe $119,000 on their home and $16,000 on a car – both of which have a low, fixed interest rate. They cash out $135,000 (or more, for those who actually consider taxes) from their accounts and pay these debts off. Yay, debt free! Here’s what’s going to happen. They either don’t withhold taxes, or don’t withhold enough for taxes. I don’t need to tell you what happens next. If paying off debt is your goal – a noble goal, indeed – make a debt reduction plan. Should we liquidate investments over a three-year period to avoid increasing our tax bracket? Do we have cash flow to make extra payments? I prefer clients not to carry large amounts of debt in retirement, but the truth is, that isn’t reality for a lot of Americans. There is no shame in still having a mortgage, student loans, or car payment in retirement. Just make sure that the debt makes sense and it carriers a low interest rate. If you are liquidating assets, make sure your investments can still provide the income you need over your retirement.
3) Spending too much, too early – sometimes having a retirement account that you can access without the early distribution penalties can seem like an ATM. A common mistake I see amongst retirees is spending too much money in the first year or two of retirement. This is incredibly common. You want a new truck. Europe, Asia, and Australia are calling your name. That Harley needs a rider. You’re paying for everyone’s vacation. Outside of their home, most retirees’ biggest asset is their retirement account – this ominous account with money that you can access someday in the future. Well, now is that time. Before you go and splurge at Bass Pro Shops or Pottery Barn, or even nice dinners out every night, you need to understand the long-term implications of your spending habits. Retirees rationalize overspending early in retirement because they believe they can make sacrifices in spending later ; this simply doesn’t happen. Remember, you aren’t saving any more money or collecting paychecks.
4) Taking on too little or too much risk – a lot of retirees tend to fall on one of these extremes. I’ve seen potential clients move all their company retirement to the stable value account, never mind the long-term impact of low returns. I’ve also seen potential clients with no knowledge of investments become investment gurus at the moment of retirement and day trade their accounts. More commonly, retirees simply take the set it and forget it approach – living with a lower return potential or carrying retirement ruining risk. I think it’s important to get a good idea of your risk tolerance periodically. Understanding your tolerance for risk can also help you adjust your expectations. Too often, retirees rely on non-personal, blanket advice. Just because that higher risk level has a mathematical probability of success does not mean it’s the right fit for you. Additionally, your risk level might have made sense during the accumulation phase, but it may not during the distribution phase. Some retirees have a lot of time on their hands and can get caught up with the sensationalism of the news, causing them to make investment mistakes. Get a plan in place and live your life.
I could write a really boring book about all the mistakes people make in retirement, but I hope this short list gets you thinking. The truth is: many people go into retirement without a plan and just wing it. As a planner (with everything I do), I just can’t make sense of this. You can go to the gym every day and just workout, or you can set a regimen. I’ll argue the latter produces better results. The best way to avoid these and other retirement mistakes is to have a living plan. You should revisit this plan at least annually. You should discuss this plan with your significant other. A lot of the mistakes I’ve mentioned are due to pent-up demand. You’ve worked your whole life and you want to enjoy the fruits of your labor. I personally believe having a financial coach can help you live your best financial life. If you’re thinking about making any big decisions in retirement, discuss it with your advisor, or run your own numbers. Retirement should be a wonderful stage of life, but financial blunders can ruin your golden years. If you’re close to retirement, I encourage you to talk to your advisor often. If you don’t have an advisor, I suggest you start interviewing. Paying a fee to have a professionally crafted plan can go a long way in building and enjoying a successful retirement.