Highlights of the 8 Retirement Planning Disaster Drivers

Nearly all expert advice is based on the right things to do to ahead of retirement. We agree you need to do the right things and we’ve captured them in our list of 8 Retirement Planning Success Drivers.  Take these steps and you’ll be well prepared for your secure retirement.

But succeeding financially is based on doing the right things and, sometimes even more importantly, avoiding the wrong things.

I was painfully reminded of this reality when I spent 12 months repairing my aunt’s retirement after my uncle died and she was faced with immediate insolvency. Many retirement disasters have their origin in poor preparation, but this was not the cause of their collapse.

In fact, they were remarkably prepared. In adjusting for inflation, when they retired in the late 1980s, their assets were equivalent to $1.1MM in today’s dollars, and their expenses were initially well matched with expected income and investment returns.

They had every reason to succeed, but they miserably failed, ending with less than 10% of their in assets remaining just prior to my uncle’s death. Over 90% was tragically destroyed.

And it wasn’t that their lifestyle quickly doubled or tripled from retirement day forward.

It was that they were undermined by committing 7 of the 8 retirement planning disasters. The only one they avoided was the 8th. They never planned to work beyond 62 and were fully prepared.

Savvy wealth accumulators always learn from the mistakes of others, in order that they might avoid the same fate.

You now have the unique opportunity to openly examine the real mistakes that often happen during retirement. Some also occur well before retirement. Regrettably, my aunt and uncle were not alone in making these mistakes that undermined the secure retirement that they earned and deserved.

And unfortunately they won’t be the last.

Below is an overview of each Retirement Planning Disaster Driver. For detailed information on each, click on the title,  its icon above, or ‘read more’, and you’ll go to a page that explores the driver in greater depth.

1. Free is Often Too Expensive: With focus on saving for retirement, free things are generally good if the money you save is used to grow your retirement accounts. There are a few areas, however, where free costs too much.

The first and most dangerous is financial advice. While we advocate financially educating yourself and taking a hands-on approach to managing your finances, there are critical times when professional advice can provide a high return on what you spend.

When you develop your first serious financial plan, even if you do it yourself, it’s useful to get it reviewed by a fee-only financial planner. The other times it’s helpful to seek professional advice is when you’re considering a major shift in your previously validated strategy, or you’ve just suffered a major financial setback.

Also, when you have a major life event like marriage, divorce, kids, or starting a business, it’s worthwhile to seek professional financial, accounting and/or legal advice.

Outside paid advice is valuable due to its objectivity and the professional’s experience in seeing your situation from an angle of having helped others with similar circumstances. Conversely, free advice always comes with hidden costs.

If the free advice is from a friend or acquaintance who doesn’t have the right depth of knowledge and experience, the price may be that the advice delivers poor results. If the advice is from a financial planner who is ‘free’ (but makes their money on commission from the financial products you buy), the advice may favor their commission ahead of your interest for the best product for your needs, with the lowest fees and best returns.

Unfortunately, a major undoing of my aunt and uncle’s financial future was the free financial advice they sought at ‘spaghetti dinner seminars’ hosted by commission-based planners. They thought they were saving money by getting no-cost advice. It actually cost them a bundle.

There are also other retirement-related areas where free or low cost is simply too expensive…(read more).

2. Plan Departure Means No Plan: Developing a realistic retirement plan is a significant positive step in attaining the retirement of your dreams.

A complete plan will include projections for the cash you’ll need to support your lifestyle for the rest of your life, and potentially that of your significant other. It will also specify the mix of assets you’ll need, and might detail the disposal of some assets and the addition of new ones. It should also include some form of an estate plan. All good stuff.

Unfortunately, despite the effort invested, some future and current retirees either completely ignore the plan they’ve developed, or choose to depart significantly from what was specified, either in the amount contributed, investment mix, or both.

While it’s important to make adjustments to your retirement plan to reflect changes in your situation, departing from an existing and valid plan without conducting an analysis, followed by a formal revision, will undermine your efforts to create the retirement you envisioned.

Before departing from your current plan, formally rewriting it to reflect your new situation is a critical reality check because if you can’t make it work on paper, you certainly can’t make it work in real life.

It’s a mistake that had a devastating impact on my aunt and uncle’s situation. Part way through their retirement, despite that everything was going according to plan, they radically changed their investment mix to chase higher returns, only to lose half of their original liquid assets…(read more).

3. Negative Emotions Are Costly: Humans are emotional creatures despite that we believe we are mostly logical. We often make decisions with emotion, later justifying them with some form of logic. It’s a simple reality that’s important to acknowledge.

This can be especially true with finances, as a Harvard study on emotions affecting financial decisions shows. Some outcomes can be positive, like when fear of poverty in retirement motivates us to take the right steps to attain a secure retirement.

In other cases, mental state can have negative consequences. Conditions like hoarding, depression, bipolar disorder, substance abuse, reckless spending, and a host of others can directly or indirectly affect one’s ability to prepare for retirement.

Additionally, there are some emotions we all experience to one degree or another. One particularly costly situation is the combination of greed with ignorance of the potential financial risks…(read more).

4. Relationship Turmoil Affects Finances: It’s impossible to separate finances from the relationships in our lives. The two are deeply intertwined, but it’s not always evident to us of the influence they have on our decisions.

Disagreement over finances is often cited as the number one source of relationship turmoil, and money arguments are a top predictor for divorce. In planning for retirement with a significant other, it’s not only a financial decision which is difficult on its own, but it’s also a time where each partner is forced to think about how they want to spend the final chapter of their life.

When there’s alignment between partners on goals, objectives, and vision for the future, the partnership can be a great source not only of happiness, but it also can make retirement planning easier, with a much higher prospect for success.

But when there’s disagreement, a stand-off can delay or completely undermine financial preparedness for the future. For my aunt and uncle, after they were well into retirement, there were several key decisions about which they could not agree, and the cost to their wealth was staggering…(read more).

5. Living Large Steals Tomorrow: The first retirement planning success driver is to control your burn rate – the total annual spending required to cover your lifestyle — and your debt. If one can’t get this right, they are doomed to a permanent paycheck-to-paycheck existence, with little or nothing saved for retirement.

Living consistently beyond your means will rob you of the brighter financial future you deserve. Despite best intentions, it’s not easy to consistently control your burn rate because there are many ways in which expenses quietly edge up.

Increases in your living expenses can be caused by: price increases in what you’ve always purchased; lifestyle ‘creep’, where you either gradually or quickly expand your discretionary spending; life events that result in either one large expense, like a wedding, or a longer-term spike in spending like funding a 4-year college degree or buying a house; unforeseen catastrophes that impact your earnings ability, or large expenses for medical bills, uninsured property losses, or other single events.

Even those who have previously managed their expenses proactively sometimes slip, or are pushed, into a larger lifestyle. This can especially happen in retirement, like it did for my aunt and uncle…(read more).

6. Complexity Causes Confusion: In preparing for retirement it’s important to keep your plan and all its components as simple as possible, while still delivering the results you desire.

If unnecessary complexity slithers in, the possibility of poor decision-making increases, and the likelihood of details falling between the cracks jumps.

One example from my aunt and uncle’s retirement tragedy is that they established a valid and comprehensive will, which was smart. But years later, they were talked into an annuity wrapped in a living trust from a slick salesperson at one of their many ‘free’ financial advice dinners.

While a trust may be the right decision for some, it wasn’t for them. They didn’t understand what a trust was or how it worked, so they thought their previous will was still valid. Further, they never moved their assets into the trust, making it a completely worthless. To make matters worse, some details of property distribution upon death conflicted between the will and the trust.

As I sorted out my aunt’s finances out after my uncle died, I only knew of the will and began to move forward on the assumption it was valid. The trust was later found by chance during basement clean-up. My aunt had no idea that the trust and will had any bearing on each other.

When I found a competent attorney to help me sort this out, his opinion was that the trust was simply a sales tool to sell what ended up being a terrible annuity. In fact there’s a class action suit for deceptive sales practices now pending against the company who issued the annuity. An overall sad mess, and a regrettable example of how unnecessary complexity can lead to confusion.

Another situation where complexity hurts is in your investment mix…(read more).

7. Autopilot Invites a Crash: When it comes to retirement disaster drivers, this can be among the most deadly. Much retirement advice suggests that the hard work of retirement comes in the preparation and planning phase and that, once you reach your big day, you can relax and enjoy the fruits of your labor.

While that is the objective of a well-planned retirement, the hard work on your finances must not stop on retirement day. As you leave the workforce where you generated your income, you shift to complete dependence on your retirement income streams, and the money generated by returns and withdraws from your assets.

Simultaneously, you enter the phase of your life where uncertainty becomes the greatest. How long your retirement will last, your level of health and medical expenses, and the lifespan and health of your significant other are all foundational uncertainties.

Additionally, the assumptions in your retirement calculations for inflation, interest rates, return on assets, healthcare premiums, and host of other factors are guaranteed to be at least partially wrong.

The combination of losing your job-related income stream, combined with many uncertainties, places you in a less flexible situation than you enjoyed during your working years. The worst thing you can do is to keep your retirement plan on autopilot after some of the uncertainties become certain and they clearly no longer fit your original plan…(read more).

8. Working Longer May Be Just Fantasy: I’ve talked to far too many who, behind on their retirement savings, say “I’ll work until I drop” or “I’ll just have to work until I’m 70-something”. Their uneasy laughter often follows this declaration.

Certainly for some, for a variety of reasons, there is no other option but to work as long as they’re able. But the expectation of working longer as a means to compensate for a shortfall in retirement preparation is extremely dangerous.

In study conducted by Merrill Lynch, Health and Retirement: Planning For the Great Unknown, 55% of retirees retired earlier than planned. The top two reasons were “I had a personal health problem” (37%) and “I lost my job” (27%). When you add the sixth reason, “I had to look after a loved one” (11%), fully 75% of people who retired before they planned were forced into early retirement by factors outside of their immediate control.

Given this reality, it’s reckless to build a retirement plan around working longer because you simply can’t count on that being an option, as it ended up not being one for 75% of those in the survey.

And here’s the most dangerous result of assuming a future retiree can work much longer than average retirement age: it can delay them from getting serious about their retirement preparation and planning, costing them precious time they can never get back…(read more).

⇒Next: 1. Free is Often Too Expensive