01 Mar The 5 biggest mistakes retirees make
by Jerry Lynch, CFP, JFL Total Wealth Management
So you retire and you are in a pretty good spot. Your expenses are below your income, you and your spouse are healthy and for the most part, you should have a great retirement.
In the back of your mind you are saying, ”There is no way I can screw this up.” Well, I am a big believer that you can do anything if you really put your mind to it.
I have some general guidelines for what I feel is a successful retirement for my clients. You need to have as much fun as possible, be healthy and not run out of money. If you can accomplish all three, then you will have in my mind a successful retirement. So how do you mess this up?
1. You don’t spend enough early in retirement: You should set up your budget for the first 10 years, giving yourself an extra line item that’s specifically for having fun. This may be for extra travel, checking things off a bucket list, spending extra money on the grandkids, etc. If you hold off spending, and you have excess savings in your 80s, what are you going to do then? You will not be able to do the things that could have 15 or 20 years before. Take advantage of early retirement as it possesses the best time you have in retirement.
2. Thinking rates of return or assets are more important than cash flow: Average rates of return mean nothing when you are drawing on your funds in negative years. That’s what locks in losses that have a ripple effect for the rest of your life. If you had assets in 2008 without cash flow, it means that you had to sell at substantial discounts or not sell and reduce your expenses. Either option is not my idea of an optimal solution. By developing predictable streams of income in retirement, you don’t have to count on rates of return to live on as there will always be negative years in the market.
3. Taking too much risk: I get it. We all want to get the greatest return on our investments, however, if it will not benefit you personally, why take the risk? Generally, when you hit retirement, your spending is not radically going to increase even if you double your net worth. Maybe you will do a few things differently, but your spending is not going to double, so the excess earnings are really for your heirs and not for you. The issue is that in order to potentially double your assets — especially if you are drawing down on those funds — you also have the ability to lose around half your money. If you lose half, that will generally have a huge impact on the quality of your retirement. If you will not personally benefit from taking the risk, don’t take the risk. Reduce the stock allocation of your portfolio (which reduces your returns) and realize that not losing big is much more important than higher rates of return.
4. Not thinking about taxes: Traditional wisdom for successful retirees is not to take money from your IRAs until you have to. Defer, defer, defer. You need to understand that deferring a tax liability does not make it go away. It just makes for a bigger problem down the line when your IRA grows and Required Minimum Distributions (RMDs) push you into much higher tax brackets. This means that you deferred income into higher, not lower tax brackets. Not good! You need to look at the long-term tax implications of your investments and develop ways to not just defer, but actually reduce your tax liability. This includes income modeling, Roth conversions, lost harvesting, gifting strategies, charity and many other strategies.
5. Subsidizing your kids while retired: I am parent like many of you, and I want to help my kids as much as possible. But generally, subsidizing your kid’s lifestyle is not good for them and even worse for you. Let’s assume that you are giving them around $1,000 per month. Well, that really costs you around $1,500 per month pre-tax of earnings. That’s $18,000 per year. Over a 10-year period of time — which we all know goes very fast — it has eliminated $180,000 out of your retirement fund. My point would be that it did not just cost you $180,000, but the growth on that for the rest of your life. Also, once you start, it is very hard to stop for several reasons
a. You will look like the controlling parent and over time your kid (and their spouse) will hate you for this.
b. Your kid’s expenses will increase as they expect the additional income each month. If you stop, it will send shock waves through their financial system and leave them in a worse place than before you helped.
c. Also realize that if you have more than one child, this will create resentment between the siblings and you will probably have to give them money as well.
My advice is if you have to help them financially, make sure it solves the problem. If you have to help them, pay for more education so they can make more money. Pay for a financial planner for them to help them get on track. Pay for things that eliminate the problem, not things that make it worse long term.
The hardest thing about retiring is that the financial rules that made you successful no longer apply. Growing money is relatively easy. You save, invest and over time, you end up with more money. Living off that money requires a whole new set of rules to be learned. Never play a game if you don’t understand the rules.
Jerry Lynch is a certified financial planner with JFL Total Wealth Management. He may be reached at or (973) 439-1190.
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