We are often our own worst enemy, especially when we’re on a path to success. Simple actions can easily lead us astray. While this cliché holds true in many aspects of life, it’s particularly relevant to the missteps that can derail an investor’s retirement.
For example, many newly retired individuals have grand ideas about how they’ll spend their newfound freedom. They might dream of taking a six-month cruise around the world, becoming full members of a country club for daily golf, or buying an RV to visit every national park. However, the reality is that life’s necessities persist: houses still need maintenance, groceries must be purchased, and they still need to visit the dentist every six months for a cleaning.
Few retirees have truly planned to completely overhaul their pre-retirement lifestyle for a jet-setting life of bucket-list adventures. You must factor large purchases or significant lifestyle changes into your financial plan. If you didn’t plan for years of high spending while working, chances are your retirement funds won’t support it.
Overspending in retirement isn’t exclusive to those who want their retirement to be filled with exotic escapades. Some investors assume they will spend much less in retirement now that they no longer need to buy suits, pay for dry cleaning, cover downtown parking, or attend business lunches. Retirees often spend more on hobbies and leisure activities they didn’t have time for during their working years. Healthcare costs also tend to increase significantly with age. Don’t forget your generosity: Grandparents are often relied upon for financial assistance, whether for grandchildren’s education, weddings, or first homes. While it’s natural to want to help, if you planned your retirement assuming your spending would be 70% to 80% of your working years’ spending, you might be in for a surprise.
Overspending and underestimating expenses often lead to the most common blunder—assuming you no longer need financial planning or advice. For years, you’ve adhered to a budget, planned large purchases, and prioritized saving for retirement. However, once you reach your retirement goal, it’s not a ticket to spend recklessly. Your focus shifts to making your retirement funds last throughout your lifetime. On average, retirement lasts 16 to 21 years, but with advancements in healthcare, nutrition, sanitation, and education, it could span up to 30 years. Without having a regular income, it’s crucial to have a plan that considers longevity, inflation, increased spending, and market fluctuations.
Another fallacy is not factoring in taxes. Many retirement accounts are pre-tax, which provides tax savings during working years. However, in retirement, most withdrawals are taxed as ordinary income. Considering taxes are more likely to increase than decrease, it’s crucial to plan accordingly. While you may view your $1 million retirement account as $1 million for investment purposes, it’s not the same once you enter the distribution phase. If you need to withdraw $1.30 for every $1 you want to spend due to taxes, your retirement funds will not last as long as you might have anticipated.
Additionally, don’t rely solely on cost-of-living adjustments to combat inflation. While Social Security adjusts for inflation, you may still need to withdraw more from your retirement accounts to keep up with increased spending, potentially altering your tax situation. Your financial plan should account for inflation and changes in your spending. We recommend revisiting your plan every two years to ensure you remain on track.
If you have questions or need help avoiding the missteps that could derail your retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the May 11, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
