Published November 28, 2012
1. Holding Debt into Retirement
Many people enter retirement with a mortgage, a car payment, and a couple of credit cards. As retirement approaches, the rate of return we achieve and the additional assets that we accumulate are not nearly as important as the debt we eliminate.
It is widely understood that we cannot annually withdraw more than 4% of our portfolio without the fear of running out of money. In other words, if we can accumulate an additional $100,000 of assets before retirement, we can expect to enjoy an additional $4,000 of income annually throughout our golden years. That means if we $800 per month of debt payments, then we will need to accumulate an additional $300,000 in our IRA in order to cover that monthly withdraw (using a 20% tax bracket). However, if we have a plan to eliminate debt before retirement then our assets may be able to provide a nice retirement lifestyle for us.
2. Underestimating Living Expenses
Americans, by and large, do not follow a budget. Combine this with the myth that the cost of living during retirement will be much lower than it is today, and you have a recipe for asset destruction. Most forget that medical expenses will be much higher, they will have more free time for activities to spend money, and most would like to travel some and spoil the grandchildren.
Take the time to account for all expenditures. Failure to account for the utilities, or replacing the roof or the automobiles will come at the expense of the travel plans or God forbid the grandchildren. Or, worse yet, you may be knocking on your children’s door because you are out of money.
3. Not Accounting for Inflation
It is interesting how often we forget the impact that inflation has on our lives. Yet, all of us can remember when stamps were 8 cents, when we passed by the gas station charging 29.9 cents for a gallon of gasoline to find the station only charging 27.9 cents, or when a cup of coffee cost a dime. We see it at the gas pump, the grocery store, and in most of our daily purchases. Sometimes the rate of inflation will show much lower due to real estate and some other investments, but in our day-to-day lives inflation has an enormous impact.
4. Withdrawing too much
Those who lived through the Great Depression often live well within their means, but that is not necessarily the case for the average American today. Conventional financial planning wisdom would suggest that 4% (inflation factored) is a sustainable withdrawal rate, but today retirees often are withdrawing considerably more and watching their nest eggs dwindle away right before their eyes. They believe that the stock market will consistently average 8-10% for the rest of their lives. They forget that the Dow originally hit 1,000 in 1966 and was still at 1,000 in 1981. They remember that between 1982 and 1999 the S&P 500 lost value only during one calendar year and that was only 3.19%. Withdrawing too much income compounded with the occurrence of an untimely bear market can have a devastating impact on retirement assets.
5. Not Having a Tool to Guarantee Income
The dependable and guaranteed cash flow that pensions provide have been a wonderful asset for many. But, pension plans have been disappearing and are less frequently offered to employees today. What if you could use some of your retirement assets to payout a temporary pension while leaving other retirement assets to accumulate tax-deferred? Strategies using guaranteed income could help to reduce the risk of the market and ascertain that the other baskets accumulate safely for your later use. There are still tools that retirees can use to create their own pensions and searching out a knowledgeable adviser can be invaluable to your retirement.
By eliminating your debt, assessing your expenditures, remembering inflation, not being too casual with our withdrawal rate, and creating guaranteed flows of income you can sidestep the landmines that are buried in the retirement landscape. Be prepared and enjoy the journey.
Brad Clark is a retirement advisor based in Indiana. Specializing in helping pre-retirees and retirees to plan for a secure retirement income they can never outlive. For more information, contact Brad at firstname.lastname@example.org