As advisors, retirement planning is one of our greatest passions. "Retirement" may not be the correct terminology, rather, transitioning from full time work to “work-optional”. This is a wonderful time in life to continue using all that wisdom and experience you’ve gained over 30 plus years in a new endeavor. We’ve helped guide hundreds of couples through a successful transition and we’ve done so by helping them avoid some common pitfalls that can occur without proper planning.
In this first article, we wanted to share the top 5 mistakes we’ve seen, firsthand, from retirees causing roadblocks in their retirement plan. Our hopes are, by sharing this article, you might learn from these mistakes, hopefully avoid them, and have some key takeaways!
1. Not accounting for inflation
Inflation is a nest egg killer. Averaging 3.22% over the past 10 years, inflation essentially lessens the value of your dollar and lowers your purchasing power. In 1913, the average cost of a new car was $1,432. Today a new car averages $34,342. When adjusted for inflation, a new car actually costs the same amount now as it did in 1913, which shows you the effect.
You can see that if you take your hard earned money and tuck it under a mattress, you are actually losing purchasing power. It is actually costing you by not investing your dollars in something that will keep up with inflation. A good retirement plan figures in inflation as part of the equation. The number one enemy in this phase is inflation; it erodes your purchasing power and will affect your lifestyle.
2. Starting Social Security at the wrong time
Knowing when to begin social security is vital to your plan. The longer you wait to begin social security, the higher your distribution amount will be. The Social Security Administration rewards individuals who wait to take distributions because they understand life expectancy tables. The longer the individual waits, the less installments that will need to be paid out.
What this means for you is creating a strategy that encompasses all of your retirement years and ensures you have enough money to do what you are dreaming about in retirement. Perhaps this means living off your assets first and deferring social security until you’ve maximized the withdrawal distribution rate. This is a very strategic decision and highly personal. In other words, it is recommended you sit down with a professional who can walk through it with you in order to fully understand what is the best strategy for you.
3. Not fully understanding cost of living
Similar to inflation, cost of living is always on the rise. Knowing how to account for rising healthcare costs, food, clothing and other necessities is essential to a good retirement plan. Breaking out your expenses into several categories will be quite helpful. Understanding your daily essential and discretionary expenses is critical, and don't forget to add on those major expenses such as travel and car replacement.
4. Failing to stick to the budget
Retirees have spent their whole life building up their nest egg. Once it is there, they often hire professionals to help manage it. But retirees often feel powerless, like they have no control. Retirees have a say in how they invest their money, but they can’t control the markets, they can’t control inflation, they can’t control cost of living. What they can control, however, is their everyday purchasing decisions. Not setting a budget and sticking to it is one of the quickest ways to derail a retirement plan.
5. Spending too early
This is a tough one because young retirees are in their golden age where they are often still healthy, active, and energetic. The harsh reality is that none of these things are guaranteed to stick around in your later years of retirement. This is why we often recommend, if you aspire to do a lot of traveling in retirement, to do this as early as you can.
However, spending too much, too early, can be challenging as it relates to your overall retirement plan. The market speaks in percentages, not dollar amounts. For example, a 7% annual rate of return on a $2 million dollar account is $140,000. 7% on a $1.5 million account is $105,000. In other words, spending down your nest egg in those first few years really affects your annual distribution later in life. Finding the right balance is critical here.
Stay tuned for our next blog where we reveal the other 5 common mistakes of retirees!