By Greg Sullivan | MarketWatch
There’s a lot to look forward to, but you have to pace yourself
When I talk about how to avoid failing at retirement, people sometimes ask, “Why aren’t you telling me how to succeed?” The truth is, there are a million resources for planning your retirement—as a financial adviser, I help my clients do it every day. What nobody tells you is that, once you’ve saved and prepared, the No. 1 thing you must not do is fail.
While you are still working, your finances are like a river. A stream of money is coming in. You funnel cash from the river as you need it, but more is always flowing in. Once you’ve retired, your wealth is a lake — there’s no substantial inflow, and you cannot afford to fail at protecting that lake.
Keep an eye on your spending
This seems like a no-brainer, but runaway spending is a blunder people continue to make. While conventional wisdom dictates that you need 80% of your preretirement income to maintain your lifestyle in your post-work years, recent research from the Employee Benefit Research Institute shows that nearly half of households spent more in the first two years of retirement than they had while working.
When you have a healthy income flowing in, it is easy to develop lavish spending habits. Exotic vacations, meals out, frequent shopping trips, and other treats are among the ways people reward themselves for a long week’s work. In retirement, you probably have similar desires and more time — more time to travel, more time to shop, more time to redecorate your home or pursue potentially expensive hobbies like golf, scuba diving, or boating. But in retirement, your income is a fraction of what it once was, and it’s easy to overspend assets. Pay attention to guidelines for a sustainable withdrawal rate based on your portfolio — a common rate is 4% to 5% annually, but the recommendation will vary depending upon your individual situation.
Cut the kids off
Adult children who fail to become financially independent can be a serious drain on your retirement assets. Stepping in to help a child who has a crisis is fine, but too often the “crisis” becomes a permanent condition, with grown kids coming to their parents for money again and again, sometimes seriously jeopardizing their parents’ future financial independence.
If your kids have benefited from your generosity all their lives and into adulthood, they probably take your contributions for granted and may not understand how much that is adding up to. If that is the case, it’s incumbent on you to make them aware and to gradually wean them off your assistance. Think of yourself as a safety net for your kids rather than as a permanent source of help. Getting your adult children off the payroll not only protects your retirement assets, it also, in the long run, strengthens their ability to manage their own lives.
Plan wisely in the event of a divorce
While divorce rates overall have begun to decline, they’ve risen among Americans over 50 years of age, with approximately 25% of the divorces today occurring among couples who are 50-plus. And though a couple may have enough in retirement assets to support them comfortably, a split of the assets — paired with the fact that those same assets must now support two households rather than one — can strain the budget and change the realities of the individuals’ lifestyle.
It’s understandable that couples don’t want to talk about divorce. They probably don’t want to talk about it with their friends or families, and they definitely don’t want to talk about it with a financial adviser, so there can be a tendency to put off dealing with the practical details. But there are steps to make sure both you and your spouse (and any dependent children you may have) are well taken care of, and the sooner those plans are begun, the smoother the process will be. Because the dissolution of a marriage is so emotional, tensions can run high in even the most cordial of circumstances — you should step back and look at your financial options calmly and in a way that will lead you to more thoughtful decisions.
Beware of vacation home fantasies
In peak earning years, many people dream of a second home, a getaway where their families can relax on weekends and during summer vacations, or a future retirement place, where they can pursue their hobbies and enjoy life. It seems like a solid investment, but all too often that vacation home becomes a serious burden. You may not realize how expensive maintaining two homes will be once your income drops to postretirement levels.
Ironically, the gap can be most dramatic for the affluent. For one thing, people with higher incomes tend to buy more expensive homes and to be more lavish in their spending, so the drop in income is more precipitous. And if a recession should hit and/or the real-estate market take a dive, houses in vacation spots are particularly vulnerable — it can be difficult to sell them without taking a significant loss. Before you buy that vacation property, do a clear-eyed analysis that considers both the initial investment and ongoing costs to see what you can afford — and then stick to that plan.
Don’t under-live your wealth
Amazingly, under-living your wealth can also lead to a retirement fail. Retirement is not only the end of one phase of life, it’s the beginning of a chapter in which you have time to explore new things. But people sometimes fail to live fully in their retirement years and truly enjoy what they have built. If you’re a cautious spender, old habits die hard and irrational fear of the future can take hold; you may remain in full-on save and conserve mode even if you could easily afford to indulge your interests in whatever way you choose.
Look candidly at your retirement “lake” and then dip out a bucket that you can spend without worrying you’ll run dry. Let your “fun bucket” set your mind at ease, and learn to take pleasure in what you’ve worked so hard to earn.
