OK, no one likes to make mistakes. As we journey through life, and make mistakes from time to time, we tend to learn from them and not make the same mistake again. At least that’s the plan.
Retirement, however, presents us with challenges we’ve not had to face before, and sometimes, we realize too late that while they are correctable, the effect of those mistakes will have a profound influence on how we live the rest of our lives.
For the past few years, I’ve been involved in a project that attempts to teach others a new way to think about and plan for retirement. It’s an online school with courses, starting with a free one, that hopes to train your brain about retirement.
What follows here is description of 4 mistakes that too many people make after they retire. We all understand the need for more money and there are dozens of ways and hundreds of advisors willing to help you make well informed decisions about growing your money.
But then retirement arrives, and all of a sudden you’re no longer focused on growing your money, but spending it. The big challenge becomes how to keep from running out of money before you run out of life.
I have a short video in my free course called 7 Words. Those seven words are as follows: Every Year, Everything You Buy, Costs More. Think about that for a minute. How much do we pay for gasoline, for milk, for rent, for health care, compared with what we typically paid for it 30 years ago? Oh, sure, there have been spikes like what happened to gasoline in 1980 when war began in the middle east. That tends to skew the average numbers but the overall trend has been upward.
So critical mistake #1 is not understanding inflation. Before retirement and you were part of the workforce, chances are your earning capacity increased along with the price of everything you bought. Remembering how much you paid for a loaf of bread a year ago is almost impossible. But now that you’re retired, price increases are not offset by additional income.
Critical mistake #2 is not being ready for new health care challenges in retirement. Oh, sure, there’s Medicare, and you can buy a Medi-Gap policy which helps with the 20% that Medicare doesn’t cover, and you can get an insurance policy to help pay for drugs when you get sick. All that’s really great. But there’s another health issue to consider.
With more and more of us living longer and longer, the inevitable result is more and more of us lose our ability to look after ourselves each and every day of the week. We all have what are known as activities of daily life. They are known as ADLs. Things like taking a bath, preparing a meal, taking your prescribed meds and so on.
When it happens and you are now unable to perform some of the critical ADLs, it becomes necessary to seek what is known as long-term care, or LTC. And that costs a lot of money. The only remedy is to either die quickly or have enough money to pay for it. There’s one other remedy and that’s having to live in some kind of care facility where it’s paid for my Medicaid.
That’s not to be confused with Medicare. Medicare covers illness and routine medical care. It does not provide benefits for LTC needs.
Critical mistake #3 has to do with Social Security. Chances are you’ve put in 40 quarters of work along the way, each one of them resulting in money being withheld from your income and sent to the Social Security system. Many of you know that you can start taking benefits at 62 with the window essentially closing at age 70. It doesn’t actually close but there’s no financial advantage to not take benefits if you’ve arrived at your 70th birthday month.
There is no room in this article to delve into which month of the possible 96 months available between age 62 and 70 for you to file a claim. There are far too many variables for me to explore them here.
It’s further complicated by the fact that President Trump is making noises, along with Republican legislators, that they want to shrink the Social Security system. I don’t see that as politically realistic, but it does lead to this potentially critical mistake, and that’s over estimating how much of your needed income will be provided by Social Security. The reality is for most people, it will only provide about 40% of what you were spending before retirement.
Critical mistake #4 is withdrawing money too quickly from your retirement income accounts. There has long been a rule used for decades that suggest if you take 4% annually, you’ll never run out of money. It’s called the 4% Rule. Many of us in the retirement planning industry now think that assumption is too high. It’s become outdated for the reasons listed above.
I have no idea how well your investments have performed up to now. I have no idea how well your investments are going to perform going forward. I do know that you cannot expect investment returns going forward to equal what they have over the past decade. There’s a consensus among financial professionals that if you extract 4% per year, you’re going to sooner or later, wish you’d taken less than that. Maybe 3% but that too is nothing but a guess.
I encourage you to sign up for the free course at Successful Retirement Secrets. It’s called A Quick Snack, and is intended to get your brain into learning mode about retirement. Ideally, you will get started long before your retirement date arrives. Just don’t wait too long to get your brain properly trained or you might find yourself on the wrong side of the happiness curve.
Tony Kendzior \ 17 DEC 2019