Five Classic Retirement Mistakes to Avoid
The first wave of the roughly 77 million Baby Boomers is starting to retire. As they've done with just about everything thing in life, this dynamic batch will no doubt redefine what it means to be "retired." In order to do this however, they'll need to live their lives from a position of financial strength. Whether you are in this group now or not, it's helpful to know the key mistakes to avoid as you approach your retirement, whenever that time will come for you.
- Trying to Sprint to the Finish Line. With retirement around the corner millions of boomers look at their retirement nest eggs with shock and horror because those nest eggs are all too often way too small. A classic mistake is to try to sprint to the finish line. Don't attempt to make up for lost time by investing in high-risk asset classes or investment products as retirement grows closer. What many fail to realize is that the math behind losing money is harsh. If you invest in something that goes down 50 percent, you now have to make 100 percent just to break even. If your "can't lose" risky investment goes down 80 percent (think Bear Stearns stock), you now have to make more than 400 percent just to break even. A much better solution is to do a combine working a little later in life than you may have hoped with tightening that budget belt just a bit more. This is a much more effective strategy for the vast majority of people than the last minute sprint to the investment finish line.
- Underestimating Your Longevity. "Live to 90 or 100? Oh no, not me!" Yes, it may well be you. This is not your grandfather's retirement. The average boomer will spend almost as much time in retirement as they did working. What's more, many Americans are living to be older. Think about that! Too few Boomers' portfolios reflect this increased longevity. Having a too conservatively postured portfolio can mean that you end up lasting longer than your money — not exactly a recipe for groovin' golden years. The solution to this mistake is to not shy away from maintaining at least some equity component in your portfolio, at least into your mid-70s. Not the whole thing, but a slice.
- Over-Nibbling On Your Nest Egg. Another classic retirement mistake is munching on too much of your nest egg each year. After years of hard work, it's natural to want to feast a bit on the fruits of your labor. But, you don't want to get financial indigestion. The solution is to face the harsh but true reality that if you retire in your mid-60s to early 70s, 5 percent is likely the maximum amount you will be able to withdraw from your nest egg annually, adjusted for inflation, and still have reasonable odds of not outliving your money. In fact, some personal financial planners are making very compelling arguments that in a lower return world, 4 percent is the new 5 percent in terms of safe withdrawal rates.
- Thinking You Can Set It and Forget It. The five years before and the five years after you retire are what many planners call "the red flag zone." You know when you are at the beach and lifeguards put up different colored flags to alert you to the water conditions? Well, the same goes for your retirement nest egg. If those years are good ones in the market, you are in luck. Your retirement plan is likely to stay on track. However, if there are choppy seas, you will have to rethink your course if you want to sail safely through to the end of your golden years. The solution is to commit to a minimum of annual reviews of your portfolio — both for your investment results and your asset allocation — while you are in this critical zone.
- Having Boomerang Children. Boomer parents have produced a whole new crop of children, many of whom are boomeranging back into the nest in their 20s and 30s for a whole host of reasons. High cost of living in metropolitan areas, high cost of health insurance, loads of student debt, etc. But Boomer parents have a tendency to share the love just a bit too much, financially speaking. The solution is to teach adult children to fish financially for themselves. If they must spend some time at home, charge them rent or make them contribute to the bills. Trying to take care of them while you also stretch to meet your retirement goals is a recipe for serious financial angst.