The Seven Deadly Sins of Retirement Planning

We all worry about having enough money to maintain a comfortable lifestyle once we stop working. Are you committing any of these seven deadly sins that will leave you wishing you had done it differently? Know that I’m not trying to save your soul here, just your retirement. Let’s dig in.

This sin plagues more than half of investors.  We are always told about the power of time when investing: let your interest compound over time and a handful of dollars each week can grow into a mountain of money. Yet we procrastinate and tell ourselves that we are young and have plenty of time to save. As the years pass, we begin to realize that we are no longer ahead of the curve, but are faced with playing catch up. It doesn’t need to be this difficult. Don’t let it happen to you.

Did you ever wonder what it would take to retire with a $1 million nest egg at age 65? Based on Morningstar’s calculations and assuming a 7% annual rate of return, you would need to save $381 per month if you started at age 25; $820 monthly, starting at 35; $1,920, starting at 45.  Starting last minute at the age of 55, you would need to save a staggering $5,778 per month. It’s pretty clear that most of us could retire as millionaires if we started saving young but this goal quickly moves out of reach if we wait too long.

So, while you’re young, schedule a free consultation with us to keep yourself ahead of the curve. Your future self will thank you.

A huge number of Americans haven’t saved nearly enough for retirement, and are missing out on the benefits of compounded interest and investment returns. According to the 2011 version of the Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), 56%of all workers have less than $25,000 saved, excluding the value of their homes, and 29% have savings that tally to less than $1,000. Even worse, 32% of Americans have no money saved at all. Retirement planning isn’t exciting or fun. Who really wants to put that money away for a rainy day rather than take that Caribbean cruise this winter? We have to use some will power and look out for ourselves down that road.

There’s no commandment regarding how much money you need saved for retirement, but plenty of experts suggest aiming for 80% of your income at the time you retire. Which means that if you retire earning $75,000, you’ll want to shoot for a post-retirement income of $60,000 per year. Some of it will probably be Social Security benefits; much will probably come from your savings. One way to help you figure out how much you need to save is to invert the 4% rule and multiply your target annual income from your nest egg by 25 (The 4% rule is a very rough tool to show how much money you can withdraw from your nest egg in retirement without tapping into principal).  So, for example, if you want to be able to draw $30,000 from your nest egg in your first year of retirement, you’d multiply that by 25, getting $750,000. This general guideline tells you that would want to retire with $750,000 saved.

Your goal of early retirement shouldn’t get in the way of the life you want to live. When you retire early, four important things happen to your retirement financial picture:

1. You stop earning a salary to support yourself and your family.
2. You shorten the period in which you have the opportunity build up your retirement savings.
3. You lengthen the period in which you are living off of your retirement income. This places more of a burden on your savings, and can reduce your standard of living throughout your golden years.
4. You could be losing out on 25 to 70 percent of your potential social security benefits if you apply before you are age 65.

Government records show that three out of four retirees sign up for benefits starting at age 62, the earliest year allowed, unwittingly giving away a large portion of their benefits. You greatly reduce your benefits by not waiting until you are 65.  On top of that, according to Social Security data, at least one member of a 65-year-old couple can expect to live another 23 years, to age 88. But remember, that’s just the average; one-third of all retirees will live to age 92, meaning you will have to stretch your savings to cover more nonworking retirement years than expected.

It’s hard to predict how your life will change when you retire. Some people retire early only to realize that they didn’t save enough to live on. Sometimes people feel lost without their job and want to re-enter the workforce. This can be very difficult once you are older. Your golden years should be about pursuing the activities that you never had time for while you were working, not being stuck in financial purgatory.

Retirement is a tremendous lifestyle change, no matter how much you are looking forward and planning for it.  It should be a wonderful time after all the hard work you’ve done over the years.

One of the biggest risks you face after you retire is the premature depletion of the funds you need to live on.  The earlier this happens in your retirement, the more it hurts you. Whether you spend too much too early or you lose money in the stock market, those losses can really cramp your style for the remainder of your time.

Some retirees start by buying things and travelling, and doing all of the things they have waited to do.  If you haven’t budgeted correctly, it can be difficult to stay within your budget with all of this new freedom.

If you have your heart set on a vacation or big purchase, put it in your long-term plan.  Make room in your budget for that boat or that trip to Paris, so you can live out your wildest dreams without sinking in heavy seas.  Spending above your budget during retirement is usually unforgiving because you don’t have a chance to earn that money back.

oo many people relocate for retirement and are disappointed when their notion of ‘paradise’ doesn’t measure up to the real thing. Your new Garden of Eden may not actually be a tropical utopia, but rather a space that affords you all the benefits you’re looking for without eating the proverbial apple.

There are many good reasons to see retirement as a catalyst to moving:

1. It is a good time to downsize. You want less space and expense.
2. It is a good time to move to that area where you always have wanted to live.
3. You no longer have to be close to work.
4. You can move to an area where the cost of living is cheaper.
5. The kids have moved out so you don’t have to worry about the area’s schools.
6. You are ready for a climate or lifestyle change.

Remember that living at the beach is much different than vacationing at the beach. You realize that the offseason means more rain, or more loneliness because all the people you socialize with have gone home. Maybe it’s just too much sun and bug bites for you to be comfortable with in the long run.  The reality of living in a place is much different than the vacation experience.

This of course applies not just to the beach but to that ranch, cabin in the woods, or mountain chalet. Our favorite vacation destinations can give us a skewed view compared to the day to day experience of living there.

How do you make sure that you are looking before you leap?  Consider these guidelines

1. Take stock of the life you are leaving behind.
   It’s hard to know exactly what you want. You may find that the town you live in is much more of part you than you realize. You have built up friendships, family and a support system.  Picking up and leaving for far away sounds inviting, but the reality of it is that more people wind up moving back to their roots than you would think.
2. Life is what happens while you’re making other plans.
   Unexpected medical problems can quickly show you that you’ve moved too far from the hospitals and medical care you need. Suddenly the remote cabin far from the hustle and bustle of the city makes you inaccessible in the wrong ways.  The older you get, the more important convenient and high-quality health care becomes.
3. Retirement encompasses all of the stages of aging. You need to plan for all of them.
   You are not going to want to base your relocating decision only on your short-term plans. The level of independence you enjoy in your 60’s and 70’s probably won’t be the same in your 80’s and 90’s. That two-story house or condo on the top floor may seem wonderful now but could become a major obstacle as you age. Also, you will want to research now to find out if there are at-home care agencies or good medical centers nearby. Mobility typically becomes an issue down the road.  What are the transportation options available besides driving? Can you order a rideshare vehicle or take public transportation?You don’t have to find one home that works for all stages of aging.  It is normal to move more than once as your needs change. Just be aware of the possibility, and make sure your retirement plan is able to adapt with you.
4. It may sound boring but, do your homework.
   Are you considering an international move? Some people think that life in another country will be the same as home except cheaper. They forget that different countries have different cultures and customs. It may be too big of a leap for the uninitiated.One of the most common reasons to move for retirement is to be close to family.  Make sure that you like the area too. Your adult children can move away due to job requirements or other unexpected twistsDecide on the type of housing that is right for you. Do you want a home that affords plenty of peace and quiet or do you want to have friends and neighbors close by? Remember that as you age, you are going to want everything to be more convenient. Having friends, family, shopping, entertainment and medical services close by will become more important as your mobility declines.Also, keep things like job opportunities and property resale in mind. Things change and you want to keep your options open.

Most of us don’t want to think about our health declining as we age even though we know it is inevitable.  According to one study, only 19% of Americans have estimated their healthcare costs during retirement. Reports from Fidelity show that a typical 65 year old couple will spend $275,000 out of pocket on medical expenses during the rest of their lives on average. This is where I say “of course your mileage may vary”. It could be less if you are very healthy and things go your way but they could be worse too.

Medicare can be a great help but it’s important to understand d what it covers and what it doesn’t. First of all, you must be 65 years old to be eligible for Medicare – so if you retire early those medical expenses won’t be covered by Medicare until you reach age 65. If you develop some serious health problems, the co-pays and deductibles can add up, and a lot of the expensive drugs may not be covered at all. Medicare Part A is free once you qualify and does covers some hospitalization. Beyond that, Medicare does cover up to 100 days of doctor ordered rehab following a hospital stay but after that, it is all yours to cover. The national median cost of assisted living is $45,000 per year. If you need a private room in a nursing home, that averages $97,455 per year. You will want to look into long term care insurance to protect yourself from these costs. A typical policy for a 55 year old man might start at $2,000 a year.

Additionally, our employers typically cover 75% of our healthcare premiums, so it’s easy to overlook these costs when planning your retirement budget. When you add these charges to the premiums you’ll pay for Medicare Part B and supplemental insurance, it’s obvious that overlooking these premiums as part of your budget would be a serious oversight. Factor in declining health as you age, and the unfortunate reality that your premiums will trend upward – and the clouds part to show that Medicare will only cover about 50 to 60 percent of your healthcare needs. Not only is pretty clear that you need to include healthcare costs as a significant part of your retirement financial plan, it’s important to consider their role in your retirement lifestyle.

We usually underestimate how long our retirement will last on both ends. We think the average retirement age is 65, but the most common age at which Americans retire is about 62 or 63.   In one insurance study, people approaching retirement estimated that they would live to age 81.  However, the average life expectancy of a 65 year old is 86.5 for men and 88.7 for women- meaning that most of us underestimate the length of our retirement by almost 10 years. If we are retiring earlier than we are planning, and living longer than we are planning, our retirement funds will be less than we anticipated and will be drawn on for a longer period of time.  That double whammy reduces our buying power during our retirement.

Another impact of having your retirement start earlier and end later than you planned is the reduction of your buying power due to inflation. Historically, the annual rate of inflation runs at 6-7%. This means that every year during your retirement, your planned income buys you up to 7% less than it did the year before. This is compound interest working against you instead of for you.  We have been lucky over the last few years to experience a very low rate of inflation in the range of 2-3%. Good for the current retirees, but bad for building our expectations for our own retirement. If you wind up drawing more than your planned 4% for your living expenses, you might have to worry about your financial well running dry.

Are you ready to make sure that you don’t commit the seven deadly sins of retirement planning? Call us now to schedule your free consultation to help you plan for your fiscally sound retirement.