10 Retirement Disasters to Avoid in 2019
John R. Bubello
Retirement Advisor, CRPS®
If you’re preparing for retirement there’s no shortage of financial strategies, online calculators or financial salespeople willing to “help”. And with the ubiquitous “You must do this before retirement!” checklists everywhere, I’ll spare you another but instead highlight the mistakes I have seen real people make as they plan for and transition into retirement.
When you can learn from other’s mistakes, why would you ever make them?
2019 Retirement Mistakes
1. Assuming the stock market returns of the last 10 years will continue
The markets, both bond and stock, have produced a long term average rate of return of about 5.5% and 9.5% respectively. But if the markets perform better than their long term averages leading up to your retirement, just like the last few years, you should expect the market to under-perform in the near term, not continue to perform better than usual or even match their long term average rates of return over the next few years.
2. Under budgeting for healthcare
This is probably the #1 mistake that I see. Government healthcare isn’t free though it’s often regarded so. And, to no surprise to anyone, healthcare continues to get more expensive at a faster rate than inflation. Some quality financial planning tools recommend increasing medical costs by 5% per year while in retirement which is 2x the current rate of inflation.
3. Not carefully planning your spending
Creating a retirement spending plan takes time. But without a reasonable estimation of your spending patterns, all the planning tools in the world won’t help. Create a retirement spending budget as step one in your preparation for retirement. It’s time well spent.
4. Ignoring the cost of inflation
Inflation is so 1980’s. Yes, to be sure, the cost of some items has remained constant or even dropped over the years (thanks Walmart!?). But you should not assume that trend will continue. It’s time to shift your thinking: your spending will likely inflate over time which can be especially damaging during a long and healthy retirement.
5. Underestimating the length of your retirement
My grandfather retired at 62 in 1975. He assumed a 10 year retirement. At age 92, he finally passed, living in retirement 2x longer than he expected! With advances in healthcare, your retirement may last longer than you think. Plan for at least 20 years in retirement plus assets for longevity. The healthy and “wealthy” (north of $750,000 in assets?) should plan for a 25 year retirement (assuming age 65 retirement) plus a bucket of assets for longevity.
6. Letting high expenses eat into your investment returns
Those who sell high fee annuities usually benefit from them more than the buyers. Recently, I “unwound” some annuities for clients that were paying nearly 4% per year in FEES on their invested assets. Given the portfolio was invested in a moderate portfolio with an expected rate of return of 5.5% it’s easy to see why the value of the annuity had gone nowhere! With analysts forecasting lower expected rates of return going forward, investment fees that you pay are more important than ever. Note: it’s not just annuities that are expensive – some fiduciary, fee-only advisers are too! Verify the fees you will pay!
7. Lumping your money into one portfolio of investments
Times-segmentation portfolio construction is likely the most important income planning concept retirees have never heard of. Time-segmentation income planning isn’t complicated yet is a very cost effective way to reduce risk and ensure a stable income stream in retirement. Time-segmentation is especially important given we are likely in the latter stages of the current economic expansion as well.
8. Assuming access to home equity to pay for retirement
Having a paid off home is great but here’s the thing, most lenders don’t want to lend money to people that have a decreasing set of assets and/or are strapped for cash. Once you retire, loans of all types, can be more difficult to get and shouldn’t be counted on.
9. Not bench-marking your plan during your early retirement years
Trust but verify. When your create a retirement plan you will have made a whole slew of assumptions. It’s important to verify those assumptions as early as possible in retirement. AND the only way to test those assumptions is to carefully benchmark your retirement plan each year, especially in your early years.
10. Don’t get too conservative, too early in retirement
No one wants to run out of money in retirement but being too conservative early in retirement can help you do just that. This is where time-segmentation comes back into the conversation. Assets should be segmented based on time-until-use and invested accordingly – Ultra Conservative investments for retirement years 1-5, Conservative investments for years 6-10, etc… incrementally shifting each segment’s composition as the time-until-use grows.
And a bonus….
In 2019, bonds pay real interest
The lowest of the lowest interest rates are gone. While your bank may be paying you nothing, certain bonds are finally a great addition to your portfolio. For years, bonds weren’t particularly helpful in generating retirement income. Not so anymore…
Please Note: Speak to your tax, legal or financial advisor for specific advice about your particular plans and situation.