Many people do their own retirement planning, which is fine. Yet most should at least consider hiring an advisor with planning experience. A small mistake can be corrected if caught early. Once you let the years go by, the results are baked into the cake.
You’ll have to eat that cake, sooner or later. For you own planning, here are five big retirement mistakes people make.
Mistake No. 1: “I’ll need money for about 15 years”
One big retirement mistake is that people underestimate how long they are going to be retired, thinking they’ll retire at 65 and die by 80 or so. Yet between two married people, one might live for 30 years in retirement. If you are statistically affluent, you might live to be 100.
You know (or should know) that after 30 years everything is going to cost twice as much or more just because of inflation. Because people underestimate how long they will live they invest improperly, which leads to the second mistake.
Mistake No. 2: “I should own mostly bonds and avoid stocks”
When you are investing for retirement, you have risk on the front-end (volatility) and risk on the back-end (inflation). Most people, however, seem to want an account statement that doesn’t give them any surprises, one that show the same, steady balance every month.
Avoiding volatility with fixed-income investments means you won’t have protection against inflation. For that, you need investments in stocks. Any portfolio that leads to an account statement that is the same every month is one that won’t get you where you need to be 10 years from now.
Mistake No. 3: “Dividend stocks offer income plus growth”
Retirement investors fixate on current yield over total return. When I sit down with retirees, they get hopped up over an investment because it’s yielding 4% or 5%. But the higher payout means a lower long-term return because you’re getting more of it upfront.
When there’s water in the well it shouldn’t matter whether it’s from rainfall or snow, so long as there is water in the well. The average retiree these days is holding most of his or her portfolio in large-cap dividend-paying stocks. Dividend-paying stocks can get overpriced or underpriced. Who’s to say they won’t be the laggards over the next 10 years?
Mistake No. 4: “I’ll spend less when I’m older”
The other big retirement mistake is the idea that your expenses fall dramatically over time. Every retiree thinks that in their 80s expenses drop big-time. You’re not going travel as much, eat out as much, and so on. It becomes a license to spend more early in retirement.
The truth is, I have not seen people’s expenses drop dramatically, but I have seen them shift. The percentage you spend on healthcare, or your grandkids, changes.
Assuming your expenses will continue to rise is thus a safe assumption. If healthcare becomes a bigger slice of the pie, it will rise at double the rate of inflation. You will use more of your income to pay for medicines, therapy, things out of pocket. It’s going to rise a heck of a lot faster than going to the local pizza joint for a chicken parm dinner.
Mistake No. 5: “Retirement is about doing nothing”
It’s a non-financial point, but it matters. People underestimate how valuable it is to keep something in your life to focus on, something to bring meaning to your retirement. If not, you end up just running out the clock. Yes, you might have family but often they live in other states, especially if you move to a lower-cost state in retirement.
You need to find things to make sure retirement is enjoyable, not just the absence of work. Maybe you learn something, maybe you do some consulting. You get old quickly, I find, when you don’t have something to do.
Look before you leap. Unless you are forced out, I don’t see why folks are so eager to retire. I’ve talked some folks out of retirement, and they’ve been happy that they did it. Even if you take a pay cut, it’s wonderful to keep yourself engaged.
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