5 Financial Trends Retirees Should Avoid

Avoiding Poor Financial Decisions in Retirement

Last week, I was able to spend a few days by the pool in Palm Springs with my family.  While making small talk, I was asked to share some common problems retirees face.  Over the course of my career, I have seen several repeated patterns that create issues during the last years of retirement.  Below, I share a few of these patterns / behaviors which I have seen result in poor financial decisions and reduce the overall probability of achieving goals during retirement such as enjoyment, flexibility, and control.   

1. Using a 401(k) to fund a large purchase.

At times, individuals heading into retirement or during retirement will transition residence to something such moving into a senior retirement community that often requires a large down payment.  For most retirees, their most valued asset is their current residence.  In most cases, retirees will use their equity value in their primary residence to complete the purchase of the retirement home.  However, sometimes that equity value isn’t enough so retirees will look towards their second largest asset, usually their 401(k) to fund this down payment.  When funds are pulled directly from a 401(k), several issues may transpire such as a mandatory withholding, a bump up in tax bracket and increased Medicare premiums.  Retirees should fully understand the overall implication of tapping into a 401(k) to fund a large purchase.

2. Keeping up with the Jones’.  Over-leverage - carrying too much debt.

After a long, hard career, a well-deserved retirement is promising, and retirees can have aspirational lifestyle goals which may not have been factored into their financial plan.  These goals often center around travel and primary residence upgrades including remodeling and furniture.  With the easy availability of credit, I have seen retirees fund these expenses using credit cards.  If not managed properly, these zero percentage starter cards create longer term problems around incurring high interest rate debt. Additionally, the ability to paydown these debts may be limited given fixed retirement income sources.  It is important to ask yourself if you are spending in line with your financial plan during retirement and also to view your total credit card debt as an outcome of your behavior.

3. Becoming the Bank of Mom and Dad.

As a parent and / or grandparent, you always want to provide for your children and / or grandchildren.   Many times, financially supporting your children and / or grandchildren has a profound impact on their lives.  However, there is a balance between one-off financial support and becoming the Bank of Mom and Dad.  For these decisions, it is important to weigh the benefits to your children and / or grandchildren of the immediate help versus the long-term financial teachings for your children and / or grandchildren.  Additionally, it is also important to consider the impact of this decision to your own financial situation.  Making financial decisions that teach children and / or grandchildren prudent financial habits may be the best tool to save your wealth in the long run.  We believe that open communication is the key for the next generation to become financially intelligent. 

4. Trying to find the best investment.

As you enter the last 4-5 decades, finding creative investment strategies for outsized financial returns tend to fail.  These investments tend to fail given a lack of financial reporting transparency, low market adoption and limited liquidity options.  A solid investment strategy removes emotion from the equation and is broadly diversified.  As volatility increases along with signs of a slowing economy increase, nerves can run high.  It is precisely during these times that having a well thought-out and disciplined investment strategy can help protect your wealth.

5.  Taking the eye off of cashflows. 

When you are young, the keys to retirement planning are starting early and saving as much as you can consistently.  Having wealth enables peace of mind around financial expenses.  At the same time, during retirement, it is critical to avoid taking your eye off of cashflows and budgeting.  We recommend that tracking your budget using broad categories such as essential items, discretionary, etc. is the best way to maintain consistency around cashflows.  It is important to make sure your discretionary dollars are going towards experiences that align with what is important to you.  We have developed a workbook titled “The Next Best Decade” to help clients identify what they value and experiences that align with these values. 

While the road to retirement focuses on savings and wealth accumulation, retirement itself is a big life event that encompasses a lot of emotion.  Having a sounding board while you are making life decisions can be extremely helpful in ensuring your retirement is what you envisioned.  Walking through some of the situations outlined above can be helpful in making better long-term decisions for you and your family.  We are always here to help our clients navigate through life decisions. 

Related: Small Business Owners: When Your Business Is Your Estate