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It doesn’t take much to derail a strong retirement plan. Fortunately, the probable causes of retirement failures are well known and often preventable. When you know the most common causes, you’re more likely to avoid losing your independence and financial security.
Help too much. People often dig too deep into their retirement funds to help their loved ones.
Many parents don’t like turning down requests for help or seeing their children deprived. Some are too proud to tell their children they can’t afford to help. Most grandparents, of course, like to pamper their grandchildren. Although children and grandchildren are the most common beneficiaries, sometimes calls for help come from others.
Your retirement spending plan may include gifts for loved ones. But you must know the limits of what you can afford to give and stick to those limits. Taking care of yourself and making sure your financial independence isn’t jeopardized comes first. Let your kids know that if you help out now, you’ll likely be turning to them in a few years to help you get through retirement.
When you don’t want to reveal the hard truth to children or others seeking your help, one solution is to have a financial advisor explain the facts to those seeking help.
Second residences. A second home is part of the retirement stereotype. But the costs of a second home can be staggering and eat up a significant chunk of savings.
Most people focus on fixed and predictable expenses when considering whether they can afford a second home. They don’t leave enough cushion for surprise expenses that arise. Especially critical are maintenance costs that can add up a few years after ownership. Your spending plan must account for many unexpected expenses.
The usual response from people is that they will rent or sell the second home if it becomes a burden. Unfortunately, there is no guarantee that when you need the money, the house will be able to rent or sell for the price you need.
A second home also ties up much of your equity that could have been invested.
Get into debt. It used to be routine to be debt free in retirement. More recently, many financial advisers have urged people to hold onto debt, especially at recent low interest rates, during retirement. Data shows that more people age 65 and older are in debt than ever before.
Debt can be a valuable financial tool, but it also reduces your financial flexibility. I recommend that people have enough guaranteed income to cover their regular living expenses, including debt payments.
Some people go into debt to pay for medical expenses. The potential can be minimized by choosing Medicare coverage that minimizes unplanned out-of-pocket medical expenses. Insurance increases your regular expenses, but caps most out-of-pocket costs.
New business. A significant percentage of retirees leave successful careers but want to continue working and producing by starting new businesses.
That’s fine for people who started businesses in the past and know the angles. But the skills for success in other fields often don’t transfer to being a successful entrepreneur. Be aware of the high failure rate of new businesses and protect the bulk of your retirement assets. Only the capital that you do not need to maintain your standard of living should be at risk in the business.
The solo years. Many retirement plans are successful as long as both spouses are retired and together. But when one of the spouses passes away, finances can fall apart. A Social Security check stops and other income may also stop or be reduced. In addition, non-monetary contributions from the other spouse are often overlooked. People may need to be paid to perform tasks that the deceased spouse performed.
Due to the way tax tables are constructed, after one spouse dies, federal income taxes will increase even as income decreases.
Your plan should assume that at some point one spouse will live alone and provide ways to keep the surviving spouse safe.
No spending plan. A major gap in retirement planning is the spending plan. Many retirees lack a clear plan for the maximum amount they can spend each year to avoid running out of money in later years.
Too often, people greatly overestimate how much they can safely spend in retirement without jeopardizing their financial security. Others are based on general rules that do not apply to them. They spend too much in the early years of retirement, forcing them to struggle later.
You need a personalized spending plan that fits your planned lifestyle, estimated investment returns, and other factors.
