Your Own Actions: Greatest Ally or Your Worst Enemy?
When the stock market crashes, many investors worry whether they will be able to retire. When the stock market recovers, investors become more confident that they will be able to retire comfortably. In reality, the market’s gyrations have little to do with your ultimate success. Your greatest ally or the worst enemy will by your own actions, not the market’s direction at any given moment. While there are a lot of good ways to get to retirement, there’s really just a handful of mistakes that you have to avoid.
Top Ten Nastiest Pitfalls
1. You’re probably going to live longer than you think. Most investors we’ve spoken with assume they’ll hit their mid-to-late 70s. Nobody seems to realize that average life expectancy is now about 84. This means that a lot of people will live even longer, perhaps even to the early 90s. “Great”, you say? Well, not if your retirement assets only last until age 75. Planning for a longer retirement is critical for most investors.
2. You will spend more than you anticipate in retirement. Most people believe that their expenses will decrease in retirement. But the old stereotype of grams and gramps sitting on the rocker watching the world go by isn’t true anymore. Today, grams and gramps are likely to be cruising, playing golf, roller-skating with grandkids – even skydiving! For most people, living expenses won’t change much when they begin retirement. For the particularly adventurous, they may even be higher. If you don’t anticipate this, you may be sitting on the rocker because you’ve exhausted your budget rather than your muscles.
3. Long-term care is rarely considered. Longer life expectancy means that some people will spend time in a care facility. Long-term care can cost $30,000 to $60,000 per year today. If one spouse is in a care facility, that doesn’t mean that the other spouse will suddenly cease being active. All of this is to say that if long-term care becomes necessary, its costs will be born on top of normal retirement expenses. Long-term care insurance may not be for everybody, but ignoring the issue is foolhardy.
4. Are you counting on tax relief? There’s an old fable that taxes are lower during retirement. True, some retirees will be lucky enough to pay lower taxes, but not many. In retirement, we will be taxed on what we withdraw from our retirement accounts. If for all the reasons stated, you are withdrawing about what you are spending now, it is very likely that your taxable income in retirement will be close to your current income. The amount lost to taxes in retirement can be significant.
5. Inflation isn’t dead, it’s just taking a short nap. Today’s inflation rate is so low it’s almost off the radar screen. Only a few people we’ve talked to are planning for it. Most of us will probably live to see 7% to 8% inflation again. This means retirement assets and withdrawals might be worth 30% less over a 15-year period than they are worth today. Getting pummeled by inflation is absolutely avoidable, but most people will get zapped!
6. You will probably not be able to withdraw as much as you think. Most people assume that they will withdraw whatever they earn in their retirement account. But, you’re going to have to leave some of the earnings in the account in order to counter the affects of inflation. You won’t really be withdrawing as much as you think you can.
7. It’s easy to waste the most valuable years of your working life. Typically, after the kids finish college and leave the nest for good, your disposable income will increase. It’s very natural to splurge and indulge yourself at this point, to buy a tad more car or a little more vacation than you really need. Resist these temptations. The pre-retirement years should be devoted to maximizing savings and contributions into your retirement account.
8. Retirement accounts can be easily over-managed. Investment markets go up and down with surprising regularity. A lot of people are tempted to try to “take advantage” of these swings. Your retirement account is not the place to day trade. Remember, the tortoise wins the race, not the hare.
9. Retirement accounts are not lending institutions. Many employer-sponsored 401(k)s make it easy to borrow from your own account. Borrowing for yourself or lending to others seriously jeopardizes your ability to meet your retirement needs. And to add insult to injury, if these loans aren’t repaid, you will have to pay taxes on your own unpaid loan balance.
10. It’s easy to obsess about your retirement assets. Building up a hefty retirement account is nice, but if you don’t have something to do in retirement, you may not live long enough to enjoy your financial gains. Put lots of time into figuring out what you and your spouse will do during retirement. How will you spend your days? The more driven you are, the greater the likelihood that you will die prematurely if you do not have something of interest to take up your time during retirement. The first 5 years after retirement can be the most lethal for type-A personalities.
Healthy, Wealthy And Wise
Benjamin Franklin advised us all to live healthy, wealthy and wise. By avoiding these common mistakes, you will go a long way to acquiring some financial wisdom and accumulating a fair amount of wealth. For the health part, I can only refer you to your doctor.