The retirement stories I most hate to hear are about people who entered retirement financially secure but saw that security disappear over the years.
These stories are all too common, and so are the causes of most retirement failures. Usually, investment market declines are not the cause.
Ensure your retirement is successful by being aware of the most frequent causes of adverse retirement turnarounds and planning to avoid them. These are the five most common reasons I’ve identified that cause retirement plans to go off track.
Helping too much. Too often, people dip into their retirement funds to give too much money to loved ones.
Unfortunately, that often turns out to be money they need later in retirement. This also is known as “becoming the Bank of Mom & Dad.”
Many parents don’t like to turn down requests for help or see their children or grandchildren do without.
Some are too proud to tell their children they can’t afford to offer the help requested.
Most grandparents, of course, like to spoil their grandchildren.
Though children and grandchildren are the most common beneficiaries of help, pleas sometimes come from other relatives and even friends.
The natural desire to help loved ones often leads to long-term problems.
Sometimes parents give now because they believe they’ll make up the money later by reducing expenses or earning more on their investments.
Other times, they simply miscalculate. Future financial surprises coupled with the extra gifts cause problems. For example, medical bills could be more than planned.
Or investment returns might not meet targets.
You can avoid the problem of giving too much and also not have to confront family members by deflecting requests to a financial advisor.
Have those requesting help meet with the financial advisor, and let the advisor explain that you can't help.
Or you can point out that you can provide help now, but in a few years you’ll be turning to the recipient to help you get through the rest of retirement.
Often the biggest obstacles to avoiding this problem is pride.
People don't want to admit they can't afford to help a child or grandchild.
Your retirement spending plan should include gifts to loved ones.
But you have to know what you can afford to give and adhere to the limits.
Second homes. A second home in retirement is nice and part of the stereotypical retirement. Spend the winter in a warm weather location and the rest of the year somewhere else.
But many people plunge into second homes without fully understanding the consequences. Eventually, the home devours a significant part of their retirement nest eggs.
A big chunk of your retirement capital can be tied up in owning a second home. That capital could be earning interest and capital gains.
There was a time when one could count on the value of the home to appreciate, but that’s not the case in many areas now.
Also, owning and maintaining homes involves both predictable, fixed expenses and a number of surprises along the way. You’re spending plan has to anticipate these expenses, and many people buy that second home without having a cushion for the surprise expenses.
The usual response from people is that they’ll rent or sell the home if it becomes a burden. Unfortunately, in most markets, a home can’t always be sold or rented at the desired price when you need to do it. You should have a substantial financial cushion in your spending plan if you want a second home in retirement.
Too much debt. It used to be routine to be debt-free in retirement. That’s changed in recent years. Many financial advisers urge people to maintain debt in retirement. Instead of paying off debt, they could invest the cash to earn a higher return than the interest rate on the debt. Debt more often is considered a financial management strategy instead of something to be avoided in retirement.
The problem is that debt increases your fixed, required expenses.
When those fixed expenses exceed your fixed, guaranteed income, there’s the potential for problems.
The problems are most likely to be caused by unplanned major expenditures, such as medical expenses, home maintenance costs, higher taxes, or a host of other possibilities.
Home equity debt also eliminates the ability to use a reverse mortgage.
The reverse mortgage is an important way to generate tax-free cash during retirement.
You borrow against home equity, but no payments are required until you no longer use the home as your principal residence.
If you enter retirement with mortgage debt or take out a home equity loan early in retirement, the reverse mortgage option is diminished.
I favor the old rule of avoiding debt during retirement.
New businesses. A significant percentage of retirees leave successful careers but want to continue working and producing. Often, they start new businesses.
That’s fine for people who started businesses in the past and know the angles. But the skills for success in other fields often don’t transfer to being a successful entrepreneur. A failing business can quickly drain the retirement nest egg.
If you’re determined to give entrepreneurship a try in retirement, be careful.
Cordon off most of your retirement assets from the business.
Only capital you don’t need to maintain your standard of living should be at risk in the business.
Don’t borrow against your home to fund the business. Be prepared to pull the plug if the business isn’t working.
The solo years. Many retirement plans are successful as long as both spouses are together. But in reality one spouse often is going to live for a while after the other passes away.
Too often, retirement plans don’t properly account for the changes that occur after one spouse passes away, and that’s when finances unravel.
After a spouse passes away, one Social Security check stops.
The surviving spouse receives only the higher of the two Social Security checks the couple was receiving.
Other income, such as a company pension, also might terminate or be reduced.
Perhaps as important is that the nonmonetary contributions of the other spouse are missed.
Often, others have to be hired to perform tasks the deceased spouse did around the home, or they are neglected.
When the deceased spouse was in charge of the family finances and didn’t prepare the other spouse to assume the role, the consequences can be serious.
Your plan needs to assume that, at some point, one spouse will be living alone.
The full consequences of that change need to be fully considered and a course of action needs to be established.
Widowhood isn’t the only cause of seniors living alone.
A quiet change in recent years is that more retirees are living alone because of divorces late in life.
When spouses split up in retirement, often both suffer financially by stretching the nest egg among two households.
The financial consequences need to be fully considered before people 50 and older decide to divorce, and each spouse needs to have a solid plan to pay for life alone.
No spending plan.
The biggest gap in many retirement plans probably is the lack of a spending plan.
Many retirees don’t know how much money they safely can spend in the early years to avoid running out of money in the later years.
The result is people spend too much early in retirement.
Surveys show that many people nearing retirement age believe they can spend 7% or more of their savings each year without the risk of running out of money.
Financial planners and economists say the annual spending limit is around 4%, and some believe the safe spending level is even lower.
You need to develop a spending plan that estimates the cost of your desired lifestyle and realistically adjusts it for inflation over time.
Then, match the spending plan with your sources of income, estimated investment returns, and other factors. Make adjustments in your planned lifestyle if the spending and income don’t match.
Ideally, you revisit the estimates each year and make adjustments.
