I see the same risks over and over when people are close to or in retirement.
Spending Risk. The amount you spend is under your control. Despite this, I often see a disconnect between retirees’ fears of running dry and their spending habits. Connect it! Folks consistently underestimate their “lifestyle” expenses. These include costs associated with everything from bills and necessities to hobbies, gifts, travel, dining, entertaining grandkids, and other purchases, routine or not.
Life might slow down, but generally lifestyle expenses aren’t hinged on our work lives. Not working means 40+ more hours per week to spend money, as well as unlimited ‘vacation’ and thus more opportunity to travel. Those still working should look at their net monthly paychecks. You will spend this, if not more, for the rest of your life. Almost every retiree tells me they spend way more on health insurance premiums and medical expenses than expected. For the average American, it’s hard to overestimate what you will spend.
Spending on adult children is a problem. If your child is still on your payroll, I encourage you to assess whether you are really helping them or not in the long run. Years of support add up, and so do years of lost portfolio growth. Do not compromise your own retirement goals in the name of supporting another capable individual.
Spending too much on a home is risky. Move into your last home before you retire. If you plan to downsize and are depending on the sale margin to supplement your retirement, think again. Unexpected costs arise more often than not with home exchanges, like not getting your asking price, finding your new home has hidden problems, or deciding on a last minute upgrade. Having this happen while you are still receiving a paycheck makes for a happier home.
Savings Risk. You need to make sure that your nest egg is sufficient before you retire. The Social Security Administration states that Americans age 65 today can expect to live until 84.3 for men and 86.7 for women. It is smart to have a financial planner run projections to see how many years your savings will last, accounting for inflation. This will help you decide if you should delay retirement, work part-time, or drastically change your spending habits now.
Financial Market Risk. There is no denying that market movement can affect your investments, especially if there is market pull-back at the beginning of your retirement. While investors feel the big risk is a market sell-off, the bigger risk is investor behavior- or how we react to market movements.
Balance your portfolio in a way that aligns with your risk tolerance and age. More important than the allocation is your behavior in the face of volatility. Once you have set an investment strategy, stick with it and do not become reactive. The worst thing you can do when no longer contributing is sell low out of fear or buy high in hopes of catching up.
For those who do not want to spend principal, a good rule of thumb is to annually withdraw around 3-5% of your account. In an average market year, growth alone in a well balanced account could replace that withdrawal, and the good and bad years will average out. You may not be able to control the market, but you can plan for all cycles by choosing an investment and withdrawal strategy that makes sense for you.
Two pillars of advice can help you through your retirement no matter the circumstances: have a plan for things you cannot control and exercise discipline for things you can.
This article was featured in the August 12, 2018, print version of the Knoxville News Sentinel. Tom Coulter, President of Meridian Trust, can be reached at firstname.lastname@example.org.