Retirement mistakes to avoid

Retirement mistakes to avoid

October 25, 2022
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Q: When I retired last year, the market was doing fine and I felt confident my Social Security benefits and 401(k) savings would be enough to see me through. Now that the stock market has dropped by more than 20 percent, I’m not so sure. How can I be sure I won’t go broke in my old age?

Many people find retirement stressful. A friend of mine retired early only to find he was happier when he was working. Being on the sidelines was stressful for him, so he networked his way back into a job that he loves. He says he is a “happy failure” when it comes to retirement.

Even if you are successfully retired, you can still find plenty of things to worry about. One of the biggest sources of stress for many retirees is the financial uncertainty retirement sometimes brings. Many retirees wrestle with difficult questions. How much can I afford to spend? What happens if I get sick? Will I outlive my savings? A good financial plan can help you answer these questions and retire with confidence. However, even a well-planned retirement can run into trouble. Here are four common mistakes people make that dramatically increase the odds of going broke in retirement.

  1. Spending too much, especially early in retirement. Many people assume that their spending will go down when they retire, but that often is not the case. In fact, a study conducted by the Employee Benefit Research Institute found that 46 percent of retired households spent more in the first two years after retirement than they did in the year just before retiring. If you have not already done so, take time to carefully construct a budget. I hate using the “B-word” because many people automatically think it means “doing without.” However, I am not advocating austerity. I’m just suggesting that you plan your spending. It pays to be careful in the early years of retirement, especially when the market is down. Being a little more careful now will give you a lot more freedom in the future.
  2. Bankrolling your kids. This is a serious problem for many older couples and their kids. As a father of five, I understand the desire to help kids get a good start in life. However, it is debilitating to a family when adult children are dependent on their parents. Financial dependence will stunt their growth and become a financial albatross around your neck.

I have a very good friend who literally made a fortune as a bond trader on Wall Street. I once asked him how he helps his kids prepare to inherit his fortune. He wisely answered, “My wife and I decided a long time ago that we didn’t want to ruin our kids, so we told them they will inherit nothing. We have made sure they each received a good education, but after that they are on their own.”

The greatest help you can provide your adult children has little to do with supporting them financially. Give them your time and the benefit of your experience but be careful you don’t compromise your financial security (and theirs) by being overly generous with your money.

  1. Abandoning stocks. I know it is tempting to bail out of stocks right now, but stay strong. Despite their volatility, stocks are one of the best ways to beat inflation over time. Unless you protect against it, even small amounts of inflation over the years can add up to huge losses in real wealth. Your financial planner can help you figure out how much of your portfolio should be invested stocks now and how you should adjust that allocation as your circumstances change.
  2. Failing to adapt. They say that the one constant in life is change. A large part of your security in retirement will depend on how well you can adapt to changing circumstances. When the market is down or when emergencies arise, you may need to temporarily reduce your spending to keep your plan on track. After the markets recover and the emergencies resolve themselves, you can return to your normal lifestyle. Your ability to be flexible will help you stay resilient and secure. 

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to steve@montereypw.com.