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Seven Biggest Retirement Mistakes


     By Fulcrum Inquiry Damages, Appraisal, Accounting & Economics Expert Witnesses

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Expert Witness: Fulcrum Inquiry
As with most things in life, a few mistakes can dominate the final results achieved. We identify and explain the most expensive common retirement financial mistakes.
As with most things in life, a few mistakes can dominate the final results achieved. Here are the most expensive common retirement financial mistakes to be avoided:

1. Failing to build an adequate starting point – Sure, this one seems obvious, but no list would be complete without it. Albert Einstein said, "Compound interest is the eighth wonder of the world.” If a mathematician as smart as Einstein marveled at the magic of having money invested over a long period, you should place some money away consistently and early. This article explains how much the money you will need. This online retirement planner calculator graphically shows how your nest egg will grow or decline based on your savings, spending rate, investment return, and other variables that you specify.

You should not be retiring with meaningful debt. Monthly debt payments quickly cut into savings, and adds risk to your long-term plan. The typical retiree should continue working until all substantial debt is repaid. This includes home mortgages, credit cards, and all other forms of borrowing.

2. Not having a plan – Retirement is a long-term venture that requires financial planning. You need to know what is feasible and not feasible before actual transactions remove available options. The plan should be written, and include the major assumptions that form the basis of the plan.

It is hard to have a retirement plan if you have no interests outside of work. Human beings are happiest when they have goals and a regular set of meaningful activities. Retirement gives you the chance to start life over again, but the first step in retirement is knowing what you will want to do with this time. Whatever decisions are made here could have an important financial impact on your retirement plan.

3. Assuming your expenses will decrease – The old adage that you’ll need 70% of your pre-retirement income to fund your retirement lifestyle is often incorrect. Many retirees immediately fall behind in their plan by adopting assumptions that do not consider retirement plans for new hobbies, previously-deferred improvements to your home, travel, and other recreation. With the additional time one has in retirement, spending often increases to address the interests that occupy this additional time. Exactly the opposite of what some assume, expenses can spike in the first retirement years. Assumptions here should be individualized for your desires in retirement, and not be based on an assumed rule of thumb.

4. Failing to have enough equities in your retirement portfolio – You should retain liquid assets that earn a steady return and provide principle equal to what you expect to need in the next five years. Consequently, most retirees need some bond or other fixed income investments. However, the majority of retirees overdo this risk avoidance strategy, and thereby sacrifice needed return in their investments. By embracing too much safety, many retirees fail to address purchasing power erosion that occurs with inflation. Although inflation is currently low, the current low inflation rates are not likely to continue over the period covered by your plan.

Over long time periods, stocks have outperformed bonds. Unless you are spending 80% or less of your income, you need to have some investment in equities. Even though it’s scary, a healthy equities position is probably appropriate. Our risk online asset allocation calculator provides suggestions based on your age and your risk tolerance answers. Your selected investments should be in a vehicle that minimizes investment expenses. We provide some suggestions in our article Investing Made Easy.

5. Failing to diversify one’s investments and income – You should have at least four sources of retirement income. In so doing, retirees can avoid losing all their income if one source loses value. Income sources include Social Security, an employer-provided pension, rental & royalty income, a 401(k), and other personal investments.

6. Failing to address children’s needs while retired – Weddings, graduate school, down payments on children’s first homes, and bailing out adult children who have run into problems or too much debt can all occur after one retires. Generous parents often have trouble saying “no”. But, such items can be sufficiently substantial that they can wreck an already tight retirement plan. Prospective retirees should explicitly address (preferably in writing) what specific gifts to children are affordable, and then adhere to this plan.

7. Identifying the wrong place to live – New retirees often move as a means of reducing housing costs. Less expensive areas tend to be more remote, leaving the retiree feeling isolated from friends, family, activities, and interests. If the new home is not the correct lifestyle decision, travel and other costs may increase more than planned. Moving a second time to correct an initial mistake can also be expensive. To avoid these mistakes, retirees should spend considerable time in their potential new location before moving to be sure the fit is right. Absent being confident of the new location, do not build a retirement plan around saved housing costs.

Even if none of these mistakes are made, the big unknown in anyone’s retirement planning is uncertainly regarding lifespan and healthcare. Insurance and annuitized investments can address some of these risks. But, these options add cost to the retirement plan. Consequently, we do not automatically suggest these solutions for all retirees.

ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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