Avoid these three common planning pitfalls
On the surface, financial planning seems pretty simple. It’s a comprehensive look at your assets and liabilities; your projected income from all sources, including work, investments and inheritances; and — most importantly — how all the financial pieces fit together to help you create the life you envision. A few decades ago, a financial adviser might print out dozens of complex charts and table, get the whole shebang bound in leather (perhaps with an embossed cover!) and plop it down in front of a client.
Today, we recognize that planning is not a oneand-done situation. Your life changes constantly, and a financial plan is generally a guidepost, rather than a set of instructions. Plans should be updated at least yearly, or more often, as circumstances warrant.
Ultimately, successful planning zeroes in on behaviors, not predictions of stock-market performance. This can be a tough pill to swallow.
At my firm, we visit with many people who are in retirement or hoping to retire. Here are some of the most common financial planning mistakes we see.
Front-loading retirement spending. You’ve worked hard for decades, and you’re finally ready to kick back. Maybe you want to travel or enjoy long-neglected hobbies. If you are newly retired and healthy, now is the time to partake of these experiences.
Not to burst your bubble, but it’s possible to spend too much on fun in the early years of retirement, and leaving too little in reserve for the later years.
Yes, spending often declines as we age. At some point, health may decline, resulting in less desire for travel or even driving at night. This curtails activities like going out to dinner or the theater.
But which spending category rises as we age? Health care. Contrary to popular belief, Medicare’s coverage of skilled nursing care is limited. This means it’s wise to plan for the later years of retirement, and not throw caution to the wind, or believe your children will be able to care for you.
Investing aggressively to offset sparse savings. OK, I’m going to do some more bubble-bursting here. Financial planning and investing are challenging to your emotions, not your logical brain. It might sound logical to stash a couple years’ worth of living expenses in the bank, and invest the rest in an all-stock portfolio, with the idea of capturing market gains.
Unfortunately, it’s usually difficult to sit through a market correction, despite one’s best intentions. The national financial media thrive on breathless, panic-stricken reporting on every downtick of the U.S. stock indexes. This drives investors to believe they should sell everything now to protect themselves against further losses.
Sadly, in the rush for the exit, most people don’t plan to get back into the market. By trading in and out, based on the day’s headlines, you have to be right twice: When you sell and when you buy again. Typically, panic selling means locking in losses and incurring a big opportunity cost by not re-entering when stocks begin rallying again.
Also, many investors have wildly unrealistic expectations of the return their portfolios should generate. History shows it’s not unreasonable to expect an annual return in the neighborhood of 6 percent to 7 percent, over the long run, from a stockonly portfolio (one that contains no bonds, which serve to dampen stocks’ volatility during down markets).
Yet, we run into plenty of people who are disappointed by that number, or believe they can outsmart the broader market of investors and (somehow) pick exactly the right stocks to deliver eye-popping results to offset decades of poor savings habits.
Being reluctant to cut spending. This is a tough one, and it encompasses many behaviors. Maybe you
want to help your adult children who are still struggling to launch careers in expensive cities. Maybe you have a house that still carries a hefty mortgage, but you love living there. Maybe you enjoy extensive travel and staying in nice places.
There’s nothing inherently wrong with any of these, unless they put your own retirement at risk. And by “retirement,” I don’t mean the pleasant vision of luxury resorts and mai tais. Instead, I’m referring to simply sustaining yourself for several decades.
People are living longer. Most of us know people who reached their 90s or even 100. If you are in your 60s and feel ready to retire, it’s a good time to determine whether your current levels of spending are sustainable.
It’s not easy to cut spending. That’s especially true when the spending stirs up emotions around your family, your home or experiences you hope to enjoy. But if you frame retirement as a phase of life that may last for 30 years or more, you’ll get a sobering picture of your future, along with a better understanding of how today’s spending may have an effect down the road.