Editor’s Note: This is Part 1 of a two-part series on different ways that a retirement plan can go bust. Stay tuned for the second part of our series in the coming days.
Some investors face disadvantages in retirement due to a lack of planning. Lackluster savings, minimal guards against risks, no real strategies for high-cost healthcare or long-term care… These are just a few of myriad ways in how someone may be ill-prepared.
But there is also the other side to consider. How about when someone does have an effective plan set? Then it’s different.
Say that you have created what you feel is a rock-solid retirement plan. When you finally enter this phase of life, chances are you are quite confident about your financial future. Still, planning isn’t a sure guarantee of success. Oftentimes, the question of whether someone sticks to their plan is just as important.
What you may not realize is there are several factors that could actually take a retirement plan off course. Those factors may range from being an overly generous parent or grandparent to losing your spouse and needing to adjust your lifestyle to a reduced income.
While it may not be rocket science or a magic formula, knowing these common plan-derailing pitfalls might help you avoid them.
Some Retirement Plan-Busting Moves
Here are a few situations that may put a retirement plan on the rocks.
Giving In… and Giving Too Much
You love your family—and love to spoil your grandkids. But chances are helping your son buy a new car or helping pay for your college-bound granddaughter’s summer trip to Europe wasn’t factored into your retirement spending plan.
If you are known as the bank of last (or worse… first) resort to your friends and family, it may be time to rethink an open-wallet policy. While you will want to continue appropriate gift giving and may be able to help your children and grandchildren in an emergency, you will have finite financial resources in retirement.
As a result, any withdrawal you make from your retirement accounts and other income sources, that isn’t repaid, results in you having less to live on. Don’t forget about other income risks that may arise with those withdrawals, like a big tax bill.
One option is to set aside some funds for each child/grandchild, contributing what is feasible for you. Then, when a surprise financial need arises, there is an account to draw on… not a blank check from the Bank of Mom and Dad.
Can’t afford any contributions to family? It might be better to be honest about the situation early on so you can avoid any awkward requests in the future.
Generations before ours strove to be debt-free in retirement. But these days we play the interest-rate game. We may even carry the debt into retirement if we feel the interest is low enough to warrant using that money in other ways.
But debt increases your monthly outgo. Any unplanned expense, such as for medical expenses or a roof replacement, will just add to your burden. National research and statistics appear to reinforce this trend.
According to analysis by MagnifyMoney, almost one-third (32%) of Americans over age 50 carry debt loads month to month. On average, those with debt had $4,786 in credit card debt and $12,490 in total non-mortgage debt. What’s more, 4 in 10 of all older Americans has over $10,000 in credit card debt.
In turn, credit card debt may have a great effect on older Americans’ financial resources and net-worth. At the time of the MagnifyMoney analysis, the average credit card interest rate was 14%. As people cover interest payments on credit card debt, it means they have fewer funds to use for income later on. MagnifyMoney found that seniors without credit card debt had a net-worth of $120,000. Meanwhile those with credit card debt had a net-worth of $68,000 — a 43% gap.
The point is outstanding debt takes away dollars that you could otherwise use to pay for your retirement lifestyle and other goals. It literally pays off to make efforts to wipe out debt before retirement, so you have more income dollars to spend freely.
Starting a ‘Second Act’ with a New Business
The allure of becoming an entrepreneur motivates many retirees to launch their own businesses. Whether they had a prior business in working years or now have the entrepreneurial itch, it’s not uncommon for actively-minded retirees to seek a “second act.”
While you may have a great idea for the next killer app, a must-have invention, or a consultancy you think a niche market would clamor for, starting a business may not only drain your finances. Without a plan to cover your monthly living costs and other basic retirement spending, it could overwhelm your lifestyle. So, rather than going from 0 to 60 at the start, experts say consider test-driving the time and financial commitments of starting a business first.
And if this is your first time running your own show? Then you may consider tapping into as many resources as possible. Get plugged into your local business community, from local Chambers of Commerce and SCORE to Mastermind meetups and networking groups. You might even seek a mentor for your new venture if you are entering uncharted territory.
Give yourself all the resources you need to learn the business inside-and-out. That can help reduce any derailments caused by inexperience or faulty execution.
And — as we mentioned before — make sure you have the financial resources in place to cover your basic retirement living expenses. That way you don’t find yourself sacrificing the necessities to keep your dream alive.
The “Home Away from Home” Seduction
The idea of owning a warm-weather or snow-destination getaway is many people’s idea of the ideal retirement. A place where family can gather and make fond memories.
But another home can be a financial weight that ties up your retirement capital. And price appreciation, once assured no matter what market you owned in, is unpredictable. There isn’t a guarantee that it can be counted on to provide a return on your investment.
This isn’t to say that a vacation home or other “home away from home” destination is a bad thing to have. If your retirement plan is already “tight,” though, it’s important to weigh everything that may be involved. While you may know the fixed costs before you commit to buying another home, what about those unexpected, and expensive, events that could pop up? Getting a new air conditioning unit, new furnace or new roof can eat into your nest egg.
If it’s still a can’t-resist temptation, so to speak, you may consider setting aside “slush funds” to help with any surprise expenses.
What’s a Solution? Improve Your Retirement Plan
Now that you know there are additional considerations that affect your ability to live comfortably in retirement, you may need to revisit your retirement plan. And if you don’t have a retirement plan that carefully lays out your income and spending expectations, now is the time to get started.
Research shows that working with a financial professional toward your retirement goals can make a real difference. Investors with a guiding financial professional may see higher retirement savings, better overall retirement financial readiness, and other improved quality-of-life outcomes.
If you could benefit from the help of a knowledgeable guide, financial professionals at SafeMoney.com can assist you. Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.