By Brett Arends, MarketWatch
Dec. 16, 2022
We all make mistakes in planning for our golden years. But which are the worst, which are the most common, and which ones do we all need to watch out for?
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Financial planners have weighed in with the top 10 they see among clients. It's emerged in a survey conducted by money managers Natixis and just released. And it's a terrific checklist for anyone who wants to see how they're doing, and what they need to change.
The top 10:
1. Underestimating the impact of inflation (cited by 49% of advisors). This surely needs no explanation—least of all this year. The S&P 500 is down 17.5% so far in 2022, but in real purchasing power terms the figure is much more brutal, at 22%. We cannot eat "nominal" returns, meaning returns before counting inflation. Yet we still talk about these things in nominal rather than "real" terms, which means after inflation. If inflation averages, say, 3% a year, over 25 years the purchasing power of a dollar falls by 50%. Ouch.
2. Underestimating how long you will live (46%). Cue "longevity risk." Sure your savings can last 10 or 15 years. But what about 30? Leslie Beck, a financial planner in Rutherford, N.J., says this is the No. 1 mistake her clients make.
"When I tell clients I am planning until they live to 98, I ALWAYS get a laugh and the comment "Leslie, I'm not living to 98!" But I always point out that I ALREADY have clients who are living into their 90s."
Couples also tend to underestimate "joint longevity," or how long at least one of them will live, adds George Gagliardi, a financial planner in Lexington, Mass. "For a couple age 65, there is about a 50/50 probability that the husband will live to age 83 and the wife to age 86," he explains. "However, there is a 50% chance that at least one of them will live to age 90. Couples need to plan for the eventuality that they could live a lot longer than they had thought possible."
3. Overestimating investment income (42%). David Goodsell, who runs the Natixis Center for Investor Insight, says it's common for savers to follow rules of thumb such as "you need $1 million to retire," without looking closely enough at their actual retirement income. Even with a million bucks, he points out, the so-called 4% rule gets you just $40,000 a year. Planning for retirement can't just focus on the number you want by 65. It means planning for the income you will need per year thereafter—a trickier calculation.
4. Being too conservative in investments (41%). Kenneth Waltzer, a financial planner in Los Angeles, says this is the number one mistake he sees in clients: Holding too much of their portfolio in cash or deposits, and investing too little in longer-term investments, which mostly means stocks. Yes, those in cash and certificates and deposit are feeling smug this year. But this has been a rare one. Based on history, over the average 20 year period stocks would have made you six times as much money as 3-month Treasury bills: An average total gain of just under 600% versus one just under 100% (before inflation, too).
5. Setting unrealistic return expectations (40%). Financial advisors told Natixis that on average their clients are expecting to earn returns of 17.5%—above inflation! (Even the financial advisors themselves are expecting 7% above inflation). Good luck with that. Even for a high-risk portfolio of 100% U.S. stocks (the S&P 500) the long-term average has been only 6.8% plus inflation. For the so-called balanced portfolio of 60% stocks and 40% bonds the figure is less than 5%.
6. Forgetting to factor in healthcare costs (39%). "Healthcare is no small expense in retirement," says financial planner Danielle Miura in Ripon, Calif., who says this is among the biggest things clients tend to overlook. According to Fidelity estimates, she says, "the average 65-year-old couple who retired in 2022 will need $315,000 to cover future healthcare costs." And while basic Medicare is partially free, and partially reasonably modest, for most people over 65, she points out you'll still have to handle out-of-pocket expenses, like deductibles, copayments, and coinsurance.
7. Failing to understand income sources (35%). Retirement used to depend on a "three legged-stool," says Natixis' Goodsell: Your pension, your savings, and Social Security. Today hardly anyone in the private sector has a pension. Are the other two legs strong enough to support your retirement? Among the blunders many people make is claiming Social Security too early: Those who wait until age 70 will get nearly 80% more each month than those who start claiming at 62. That may sound like a "nice to have" in retirement. But for many of those who live beyond 80 that income may be a "need to have."
8. Relying too much on public benefits (33%). The Social Security Administration reports that the average benefit for a retiree is $20,000 a year. And for about two-fifths of people over 65, their Social Security benefit accounts for at least half their income. Meanwhile, even the more prosperous may not realize that Medicare will not cover their long-term stay in a nursing home. You'll have to spend down all your savings before Medicaid will step in.
9. Underestimating real estate costs (23%). If you have paid off your mortgage by the time you retire, you will still be facing rising property taxes, insurance and maintenance costs. If you haven't, you're going to have to pay rent—and those costs rise with inflation. Goodsell says retirees often consider their home equity part of their savings, but forget to factor in that even if they sell, they'll have to live somewhere.
10. Being too aggressive in investments (21%). In a year like 2022 this is hardly news, as stocks, especially speculative stocks, and things like cryptocurrencies have plunged. Have we hit the lows? Nobody knows. But by many measures U.S. stocks could still be expensive. Warren Buffett's old yardstick, which compared the total value of all U.S. stocks to America's annual gross domestic product, the market is still twice as expensive as it was during the financial crisis of 2008—and four times as expensive as it was in the 1970s. Too much stock market risk is especially dangerous for those nearing retirement, or early in retirement, who could find long-term plans upended by a few bad years in a row.
These 10 aren't a comprehensive list. When I reached out to financial planners around the country I got flooded with terrific responses, citing all sorts of other mistakes their clients sometimes make. A comprehensive list would probably be exhaustive. But these 10 are probably enough to be getting on with.
This article originally appeared on MarketWatch.
This Barron's article was legally licensed by AdvisorStream.
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