By Cheryl Winokur Munk
July 29, 2019
There are almost as many paths to retirement as there are retirees. But when it comes to financial mistakes that can derail their retirement, familiar patterns often emerge. Many retirees tend to invest too conservatively, spend too much too soon, pay too much in taxes or fall for too-good-to-be-true investments.
Retirees could ensure their nest egg lasts longer by avoiding these common mistakes:
Mistake No. 1: Investing too conservatively
A number of retirees try to eliminate risk by stashing their savings in cash, certificates of deposit or municipal bonds of very short duration. Though taking a more conservative approach in retirement can be prudent, playing it too safe can severely limit retirees’ earning potential, increasing the chances they’ll run out of money.
“It’s important to build a portfolio that incorporates an appropriate mix of fixed income and equities based on their other assets—including government benefits and rental income—their spending requirements and their life expectancy,” says David Savir, chief executive of Element Pointe Advisors, a registered investment adviser in Miami. The average man will live to age 76, and the average woman to age 81, according to the American Centers for Disease Control and Prevention.
Mr. Savir recommends retirees build a portfolio to match their spending habits and estimated life expectancy—taking into account the national averages as well as their own health and family history—and test it using forward-looking simulations. Those simulations should take into account bear-market scenarios and the chance that returns may be lower—and volatility higher—than historical norms. “This will help a client determine whether they need to spend less, invest slightly more aggressively, or both,” he says.
Mistake No. 2: Spending mishaps
Some retirees shell out significant sums of money early in their retirement, often to pay off debt or enjoy leisure activities they couldn’t do while working. The problem with spending so much in the beginning is that it can be detrimental to a retiree’s long-term financial security, says Tim Sullivan, chief executive of Strategic Wealth Advisors Group, a registered investment adviser in Shelby Township, Michigan.
While eliminating debt can be a good thing, large cash outlays can harm retirees’ long-term financial security. It may make even less sense when a retiree’s investments are earning far more than the rate of interest on the debt, Mr. Sullivan says. And while it’s understandable to want to buy a second house, take a pricey European vacation or remodel a home, retirees need to map out the potential lasting effects such hefty spending can have on their finances, Mr. Sullivan says.
He tells of a client in his late 50s who enjoyed a $25,000 African safari so much that upon his return he immediately booked another $20,000 trip. These purchases put such a dent in his nest egg that he risked running out of money six years earlier than expected and had to follow a strict budget to try to minimize the damage, Mr. Sullivan says.
Of course, retirees have to find the right balance, because being too strict with their spending early in retirement can lead to significant regrets later on. Beyond that, there’s a risk for some retirees that by being so frugal they’ll leave so much behind when they die that they will be over the federal or state estate-tax exemption limit, says Alison Hutchinson, senior vice president of private wealth management at Brown Brothers Harriman. They could also end up leaving more to their heirs than they are comfortable with, she says.
Mistake No. 3: Underestimating expenses
Advisers say it’s typical for retirees to underestimate their expenses in retirement, particularly health-care and other periodic, rather than regular, expenses. These incremental expenses—if not built into the budget—can derail a retiree’s financial security, advisers say.
Leslie Thompson, managing principal at Spectrum Management Group, a registered investment adviser in Indianapolis, recommends that people approaching retirement keep track of their expenses for at least a year, ideally two or three, before they leave the workforce, so they have a baseline to work with. They should then make the necessary tweaks to account for expenses they will no longer have and new expenses they may incur during retirement. “A well-thought-out plan should be based upon actual spending needs and future desires, with contingencies for nonrecurring items such as car purchases, major home repairs and remodels, and rising health-care costs,” she says.
Financial support for adult children and grandchildren is another expense that many retirees will want to build into their budget. Many retirees are happy to assist on an as-needed basis, but, to their detriment, they don’t consider the aggregate annual cost, says Alicia Waltenberger, director of wealth planning strategies at TIAA. “A lot of times when they see that collective number, it is eye-opening,” she says.
Mistake No. 4: Falling for investment pitches that are too good to be true
Many retirees are easily swayed by the prospect of finding high-returning investments that have little to no risk, but chasing yield can easily derail the savings they’ve worked hard to build, advisers say.
Ms. Winokur Munk is a writer in West Orange, N.J. She can be reached at email@example.com.
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