Accounting On Us
Retirement planning mistakes
Not saving enough isn't your only concern
Michael Carlin, AIF, WMS
One of the most challenging aspects of working with people’s finances is helping them prepare for retirement. When someone strides into the conference room and tells me that they’d like to work for the next year or so then retire, the increase in pressure in the room is palpable. In an ideal situation, we would prefer that people start to prepare for their retirement with 15 or 20 years, or more, to make great plans for the future. Yet, when we’re facing that small number of months instead of years, the pressure to do it right remains immense.
When people arrive in the office with a short time span to plan, it’s likely because they’re not emotionally ready to talk about retirement. Furthermore, these tend to be situations where there’s conflict between the spouses about what their financial life is going to look like. So, in terms of emotional preparedness and creating harmony in your household, we would like to recommend a few things to help you avoid making significant mistakes planning for your retirement.
Talk about real estate + downsizing
This topic is more than just discussing whether or not you plan on staying in your family home or trying to factor in the cost of downsizing in the future. What is really involved here is the emotional aspect of dealing with a real estate change in retirement. This process is about going through the discussion while trying to figure out where and how you would like to live your life beyond the working years. We find that frequently people aren’t having these discussions. We wish people would take the time to unravel the challenges of picking a destination to live in that is cost effective versus one that is close to children/grandchildren or trying to maintain the status quo with their current living situation. For every couple, there is a myriad of situations that could come out of a real estate discussion and in order to prepare for retirement, we need to get an idea of what the plan would look like so we can figure out the finances to make it happen.
Not planning for the unexpected + not factoring in inflation
Some people come in to our office ready for retirement and have an idea of what their future budget may look like. We always appreciate that level of thought and dialogue as we try to help families achieve their retirement dreams. Yet, we find most plans do not include unexpected costs. By that, I mean there’s no budget item for appliance replacement and repair, automobile repair and maintenance, or even more significant items like roof repairs that could greatly impact your long-term financial projections, so be sure to consider these costs.
When we see people coming in with their projections, we also rarely see an appropriate inflation factor. If you remember, inflation is the cost living that goes up year over year. What most people don’t know is that if we have a 3% rate of inflation over a 20 year period of time, your expenses in retirement go up by nearly double. However, many people believe that we don’t have inflation problems today because prices on some items, such as technology, haven’t gone up all that much. For example, it was common 10 years ago to spend $2,000 on a computer. Today, you still spend $2,000 but on a much more powerful computer. The same can be said for television prices. Yet in retirement, the things that you’ll be using and consuming on a regular basis do tend to have higher inflation than things like technology, so it’s critical to have inflation as a component of your retirement expenses.
If you’re looking for examples of how the cost of living has gone up and will continue to go up during your retirement years, look at these figures:
- Average price of a gallon of milk
- 40 years ago: $1.20
- 20 years ago: $2.78
- Today $4.09
- Average price of a dozen eggs
- 40 years ago: $.052
- 20 years ago: $1.20
- Today: $1.69
As you can see, these things have tripled in price over 40 years and you’re going to need to have a budget that reflects these increases.
Not planning on a long enough life + underestimating long-term care expenses
We find that people are unrealistic with forecasting the length and quality of their life in retirement. Would it surprise you to know how often people come in assuming that they’re going to live as long as their parents lived? On the flip side, we also have heard many times from very healthy clients in their 80s that they never thought they would live this long. Frankly, most people just believe when they get sick, they’re going to die right away, but that’s not necessarily the case. In fact, the U.S. Department of Health and Human Services says that approximately 70% of people over the age of 65 will require some degree of long-term care services during their lifetime. Per the study, this includes basic daily living activities like bathing, dressing, eating, every day chores like cleaning your house, etc. We work hard to help our clients craft plans that take into consideration living a very long life because running out of money in your late 80s or early 90s makes it a rather difficult situation to go out there, get a new job and start working at that point in your life.
Counting on NOT working during retirement
We often see people that have the expectation they’re going to stop working completely in retirement, have no source of income and need to immediately start drawing down their savings swiftly. Traditional retirement used to mean that permanent exit from the workforce. Now, we’re seeing a growing trend of retirees continuing to work. Key findings from a study done by the University of Michigan show that 57% of men and 54% of women left their full-time job for a bridge job at or about the time they were prepared to retire. Essentially what this means is that more and more people are able to gain a sense of retiring early and spending more time away from the office at an earlier age. When clients do transition themselves into this kind of work, it relieves substantial pressure on their financial plan. Our own experience with clients who do this is that they tend to be the ones who are more energetic and plugged into the world.
Helping adult children
Nothing can destroy a good financial plan like the unexpected task of helping your children or even grandchildren. It’s one thing to work hard to manage your own finances and successfully save over a lifetime, but it’s quite another to have to plan for others. We see parents paying for their adult children’s cell phones and helping them with mortgage payments, car payments and major expenses like insurance loss or theft. This happens more often than not and many times because clients aren’t realistic about their children’s financial situations and get caught off guard coming out of pocket. The reality is you may need to work these expenses into your retirement plan. So, take a good look at how your children are really doing financially and be honest with the likelihood that you may need to help them out.
In summary, we are delighted when people are ready and willing to have the discussion about what retirement is going to look like. The more prepared you are for that conversation, the better and easier it will go. Hopefully after reading through these items, you will start to think about circumstances you may not have accounted for when planning for your retirement. In the end, what we all want to happen is for people to have a well-designed plan that accounts for contingencies and will work in any economic environment. Addressing these issues will help you be best prepared for just about anything.
Michael Carlin, AIF, WMS, is the President and Founder of Wealth Management, LLC. He can be reached at (480) 483-3489 or firstname.lastname@example.org.
Securities and advisory services offered through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Wealth Management, LLC and IFG are unaffiliated entities.
OSJ Branch: 12671 High Bluff Dr. Suite 200, San Diego, CA 92130