One of my retired clients is fond of telling me, “Growing old is not for the faint of heart.” As we age, it becomes increasingly important for us to have a support system that will advocate for us, or “have our back.”
Putting such a support system in place doesn’t just happen; it takes time, money, and intentionality. I know far too many people who have no one looking after their emotional, physical, or financial wellbeing as they go through retirement. Many struggle through their retirement unnecessarily because of the lack of past financial planning and the impact of poor financial decisions. It’s heartbreaking to watch, especially when the suffering was unnecessary.
There are a number of missteps people can make during retirement. Here are six common ones:
- Not updating your retirement plan at least annually. Financial planning is not “one and done” and does not end when you retire. Ongoing revisions are important to provide for your comfort, wellbeing, and financial security. A January 6, 2021, article by Derek Tharp at Kitces.com points out that for people who “are receiving ongoing advice and are able to adjust spending along the way, there’s little risk they would actually ever run out of money.” He goes on to make the case that the data suggests people who don’t have professional advice in retirement are at considerably higher risk of either running out of money or living a retirement lifestyle far under what they could experience.
- Assuming taking money from your IRA is easy. IRAs are governed by a complex set of laws and regulations, necessitating a number of complicated strategies for maximizing distributions and minimizing taxes that you need to consider. These include rules and strategies around RMDs, QCDs, 72(t)s, Roth conversions, protection from creditor lawsuits, rollover rules, complex beneficiary limitations, and requirements around inherited IRAs. Mess up on any of these rules and the tax deferred status of your IRA may disappear, requiring you to hand over up to 40% to the IRS.
- Ignoring the emotional aspect of retirement. The transition into retirement is more than just a financial passage. It is also a huge emotional transition that many people find very difficult to work through successfully. Emotional struggles, left unaddressed before and during retirement, can unravel the best laid retirement plan.
- Overspending in early retirement. One common misstep is the tendency to overspend during the first five years of retirement. Many discover after it’s too late that they needed to be spending less.
- Underspending when it isn’t necessary. The same frugal mindset that helps many people save adequate funds for retirement can actually serve to threaten them in retirement. Changing the mindset from saver to spender is not easy. I’ve seen people who fearfully live a retirement lifestyle far less than they could afford, continuing to scrimp and save, when such struggling isn’t needed. Unnecessarily cutting expenses or even necessities, when the money exists to fully fund them for the rest of your life, preserves financial resources but may actually waste your emotional and spiritual human resources.
- Not preparing for the inevitable decline in cognitive functioning. It’s easy to tell yourself that “When things start getting harder to do, I will get some help with my finances.” The reality is that cognitive decline is often gradual and by the time most of us recognize it in ourselves, financial damage has been done.
These are six reasons it is important that early in retirement you assemble a trustworthy team of financial advisors, friends, and family who know you, care about you, and will be there to step in when you need them.
Related: No Free Lunch, No Free Investing