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It doesn’t take much to send a solid retirement plan off the rails. Fortunately, the likely causes of retirement failures are well-known and often avoidable. When you know the most frequent causes, you’re more likely to avoid losing your financial independence and security.
Helping too much. People often dip too far into their retirement funds to help loved ones.
Many parents don’t like to turn down requests for help or see their children deprived. Some are too proud to tell their children they can’t afford to help. Most grandparents, of course, like to spoil their grandchildren. Though children and grandchildren are the most common beneficiaries, pleas for help sometimes come from others.
Your retirement spending plan can include gifts to loved ones. But you have to know the limits of what you can afford to give and adhere to those limits. Taking care of yourself and ensuring your financial independence isn’t endangered comes first. Point out to your children that if you provide help now, in a few years you’re likely to be turning to them to help you get through retirement.
When you don’t want to give the hard truth to children or others who seek your help, one solution is to have a financial advisor explain the facts to those requesting help.
Second homes. A second home is part of the stereotypical retirement. But the costs of a second home can be surprising and consume a significant part of a nest egg.
Most people focus on the predictable, fixed expenses when considering whether they can afford a second home. They don’t leave a sufficient cushion for the surprise expenses that arise. Especially critical are the maintenance costs that can increase a few years into ownership. Your spending plan must allow for a lot of unexpected expenses.
The usual response from people is they’ll rent or sell the second home if it becomes a burden. Unfortunately, there’s no guarantee that when you need the money the home can be rented or sold at the price you need.
A second home also ties up a lot of your capital that could have been invested.
Taking on debt. It used to be routine to be debt-free in retirement. More recently, many financial advisers have urged people to maintain debt, especially at the recent low interest rates, in retirement. The data show that more people 65 and older are carrying debt than in the past.
Debt can be a valuable financial tool, but it also reduces your financial flexibility. I recommend that people have enough guaranteed income to meet their regular living expenses, including debt payments.
Some people take on debt to pay for medical expenses. The potential can be minimized by choosing Medicare coverage that minimizes unplanned out-of-pocket medical expenses. Insurance increases your regular expenses but puts a ceiling on most out-of-pocket costs.
New businesses. A significant percentage of retirees leave successful careers but want to continue working and producing by starting 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. Be aware of the high failure rate for new businesses and protect most of your retirement assets. Only capital you don’t need to maintain your standard of living should be at risk in the business.
The solo years. Many retirement plans are successful as long as both spouses are retired and together. But when one spouse passes away, finances can unravel. One Social Security check stops, and other income also might terminate or be reduced. Also, nonmonetary contributions from the other spouse often are missed. People might have to be paid to do tasks the deceased spouse did.
Because of the way the tax tables are constructed, after one spouse passes away federal income taxes will increase even when income declines.
Your plan needs to assume that at some point one spouse will be living alone and provide ways to maintain the surviving spouse’s security.
No spending plan. A major gap in retirement planning is the spending plan. Many retirees lack a clear plan for determining the maximum amount that can be spent each year to avoid running out of money in the later years.
Too often, people greatly overestimate the amount they safely can spend in retirement without endangering their financial security. Others rely on rules of thumb that don’t apply to them. They spend too much in the early years of retirement, forcing them to struggle later.
You need a customized spending plan that suits your planned lifestyle, estimated investment returns, and other factors.
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