Retiring in the place you want, with the people you want, doing the things you want, for as long as you want takes money, good genes, and a bit of luck, to be sure. But perhaps what is more important is the role that good decisions play. One of the earliest lessons in life is that actions have consequences and boy is this true in the final third of life. If you’re at or near retirement, the decisions you’re about to make will have consequences for you and your family for decades to come. Unfortunately, it only takes one bad decision to ruin a lifetime of good ones. So what are the biggest mistakes to avoid as you approach and enter retirement?
Retiring based on your birthday instead of your bank account.
Imagine that I wrote the name of a city on a piece of paper and sealed it inside an envelope. Giving you the envelope I said: “Without looking inside, drive to the airport and randomly buy a plane ticket to anywhere in the world. When you arrive at your destination, open the envelope and see if it matches with the destination that I wrote on the paper.” What are the odds that you would end up in the right city? Not good right?
As ridiculous as it sounds, that is how most people plan for their retirement. Don’t get me wrong. People save; they just don’t do it with a great deal of deliberation or a clear understanding of the end goal. Instead they do it via a completely random series of 401(k) and IRA contributions. Much like traveling without knowing your destination, saving for retirement without knowing your end goal will likely leave you far from where you need to be.
If asked when you want to retire, your answer should be a dollar amount, not a year. Retirement is about independence, not simply age, and money is critical to independence. You should know exactly how much you need to save in order to fund the type of retirement you want. Without that knowledge, there is no guarantee that your efforts will get you to where you need to be. In fact you are almost guaranteed not to reach your goal. Doing so would be more the result of dumb luck than anything else.
Retiring with too much debt.
I’ve written about debt here before, but it bears repeating. Too many have gotten caught up in the debt frenzy and now, as they approach a time that is supposed to be about enjoying life and living their dreams, they instead find themselves beholden to their jobs and struggling to make ends meet.
An increasing number of people are entering retirement with no pension, inadequate savings, a big mortgage (sometimes two), an average of about six credit cards, and debt on one or more cars. Work is not a choice at that point any more than it’s a choice for the thirty-year-old with all the same obligations and a growing family to feed.
Having debt adds risk and reduces cash flow, two things that are especially troublesome for a person at or near retirement. Your primary goal should be to retire debt free and have your income at your disposal. If you retire with debt, you will spend precious years of your retirement paying for the purchases of yesteryear instead of using your income to live the life you’ve always dreamed of.
Fumbling your distribution strategy.
Farming and cooking are two different things. One is about creating and the other is about consuming. Likewise, saving for retirement and turning that savings into an income stream are very different tasks. When converting your savings into an income stream, taking too much, too soon from the wrong account or in the wrong markets could be the difference between retirement bliss and retirement blunder.
A distribution strategy typically occurs in two phases. Phase 1 involves moving the money from pre-retirement accounts (e.g. your 401k) to post-retirement accounts. Phase 2 involves creating an income stream from those post-retirement accounts. The ideal time to begin working through your distribution strategy is with a year or so to go before retirement. You should be thinking about how much you need, where it’s going to come from, and whether your nest egg is up to the task.
When you retire, your portfolio takes over the job that the payroll department handled during your working years, namely to send you a paycheck every month. If you retire when you’re sixty-five and live until you’re eighty-five, it needs to cut you 240 monthly paychecks. There are a host of variables that will affect its ability to do that, such as the distribution rate you choose, investment returns, inflation, how long you live, and good old-fashioned luck. Some of those things you can control and others you can’t, but having a well conceived, sustainable distribution strategy will help ensure that you don’t outlive your money.
Retirement is a major transition. That transition is not always easy and is often fraught with potential risks and pitfalls. By diligently completing each necessary task and avoiding the mistakes that ensnare so many, you can head confidently into what will surely be one of the most fulfilling and rewarding periods of your life.
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