Coach John Wooden stated, “It is what we learn after we know it all that counts.” As human beings we like to feel respected and knowledgeable... and we sure don’t like to be wrong. A feeling that usually grows stronger as we get older. Sadly, this overconfidence or pride or whatever you might call it, can have disastrous results – especially when it comes to your health and to your money. Time and again, we have seen folks let their pride get in the way of a sound decision making process. A few weeks ago a good friend and client said, “I would imagine the hardest part about your business is protecting people from themselves.” She was right: we can’t battle against someone’s pride, because we’ll lose every time. We can only help people that want to be helped. We want share with you the 5 most common mistakes we see people make when they are planning to retire or planning in retirement:
#1. Making assumptions from the beginningMost people have a good idea of when they would like to retire and where their income will come from during retirement, but have no idea about anything else. And yet the “anything else” is the most important part. Her is a common statement from a retiring couple—“We plan to retire in 3 years and will live off our social security, Ronald’s pension and the interest from our investments.” This sounds like a great plan, but will that be enough income to support your current lifestyle or the lifestyle you want in retirement (which will either cost just as much as now, or more)? Will it be enough income in 15 years? How will they avoid not running out of money? If Ronald dies, what will his wife do without his social security? Will she be able to keep his pension income? Etc. Etc.
#2. Failing to protect your retirementIf the bank did not require you to have insurance on your home, would you still have it? Of course you would! Why would you want to risk one of the biggest financial assets you own, right? You wouldn’t! So, why would you risk your retirement? Believe it or not—most people do. You have several risks in retirement that could prove absolutely devastating. Just to name a few: living too long, dying too soon, becoming incapacitated over a short period of time or for the long-term, losing the ability to take care of yourself, illness, being sued, inflation, investment risk, taxes, interest rate risk... Are you protected from each one of these?
#3. Paying too much in taxesWhether you are a fan of our current tax system or not, taxes can and will eat away your retirement if you aren’t careful. For instance, did you know that the amount of your social security that is taxable is determined by the amount of your total income? Not only do you pay taxes on the income you have, you pay additional taxes on your social security. Let me put this in numbers: Imagine you have $1 and it doubles. You now have $2. Double it again and again until it has doubled 30 times. In the end you would have over $1 million. Now imagine Uncle Sam taxed you 25% every time your money doubled. How much money do you think you would have in the end now? A whopping $72,570.64! Ouch!
#4. Emotional InvestingAre you emotionally attached to your money? Well that was a needless question. We all are. We worked darn hard to get where we are and we don’t want to see it flushed down the toilet. Unfortunately, though, this emotional attachment can cause us to make the BIGGEST mistakes. We hear how good an investment is and we get greedy. The result—we buy when it is priced too high. The economy starts falling apart and we get scared. The result—we sell low. Our country is a mess—we sit in cash or CDs, losing money at the rate of inflation and taxes.
#5. Piecemealing a planTime and time again we meet individuals or families who have their assets spread across multiple financial institutions and talk to 3 or 4 different advisors, tax professionals and legal counsel every year. I commend these people on taking so much time to try to gain every piece of information they need to make the right decisions. However, this creates what we call gaps and overlaps. We often ask, “How does one advisor know what the other advisor is doing.” The answer almost every time is, “I tell them.” That might be okay if our industry wasn’t so complex, and human nature didn’t add in the “I forgot that part” factor. When we do get the okay to look at everything these clients are doing we invariably find a large amount of added and unnecessary risk simply due to the fact that they have huge gaps and tremendous overlaps in their plan. Put another way: If you feel something isn’t right health wise, do you make an assumption and go straight to the heart surgeon or do you go to your general doctor? Everyone needs a general financial doctor that can look at everything. Then when a specialist is needed they can certainly call for one.
Retirement is one of the biggest life transitions you will make and it should be planned for as carefully as anything you have ever prepared for. There might be a chance that you spend more years in retirement than you have spent working. And you better have a rock solid plan.
My hope is that this information at the very least will be enough to let you know it is okay to be humble about your retirement. It is a field we dedicate thousands of hours and dollars to every year to studying and experiencing through the lives of our clients... and still learn new ideas and approaches that we apply in our mission to help people retire successfully and stay retired successfully.
As a reminder: Don’t miss the opportunity to take advantage of our S.O.S. (second opinion service). This complimentary consultation will expire soon and our calendar stays full!