11 Ways Retirees Damage Their Retirement Success

Phil wrote in last week and asked,

Jesse – I’d love to understand the common mistakes you see retirees (and near-retirees) make. You’ve written about Charlie Munger and his “invert, always invert” philosophy. So I figure – if you tell us what the common mistakes are, and we try to avoid those mistakes (invert!), then we’ll be in a better place for it!

Phil – you genius.

I love this idea, through and through. So here are my 11 common ways retirees hurt their retirement chances.

Learn them, invert them, and then do the right thing!

Ignoring or Underestimating Inflation

Your $100,000-per-year lifestyle won’t cost $100,000 forever. Pretending inflation doesn’t exist is a shortcut to eating cat food in your 80s.

Luckily, this is well-worn ground. We have the answers.

We know exactly how to account for inflation in retirement and/or FIRE planning.

Too Much Risk & Sequence of Returns

This one hasn’t burned too many retirees over the past 15 years. But it won’t disappear forever.

In short, the sequence of returns risk occurs when a portfolio value falls too far, too quickly, in your early retirement years. It starts a “negative snowball” in your portfolio that can often be fatal (at least, fatal to the odds of your successful retirement). There are generally three main culprits:

• Too much risk in your retirement portfolio.
• Bad luck with investment markets in the those early years.
• Too much spending / withdrawals in those early years.

Some combination of these three is always at the heart of the sequence of returns risk.

We devoted an entire podcast episode to the topic. Check it out below.

Bad Social Security Claiming Strategies

What’s the best age to collect Social Security? It all depends.

But all too often, the standard retiree default I see is, “I’ll start collecting Social Security the day I retire.”

Maybe. But usually, that’s wrong.

We took a deep dive into all the critical questions you ought to ask before collecting Social Security. From age, health, spousal and survivor benefits, to taxes, sequence of returns risk, and longevity insurance. This article covers it all.

Spending: Finding Your Goldilocks

Overspending is mathematically identical to (and often a sidekick of) the sequence of returns risk. It depletes your portfolio too much, too fast.

But under-spending your retirement is actually more common! Usually, you don’t realize it until it’s too late. Granted, the “punishment” here is a hard-to-measure opportunity cost, with the only obvious evidence being, “I now have way more money than I need.”

Still, dying with millions is a retirement outcome that many people prefer to avoid.

You need to find the “goldilocks” spending plan. Not too much, not too little.

Misunderstanding Healthcare Costs

Healthcare is the monster under the bed. It’s scary in our imagination…but is it that scary in reality?

It depends.

In Episode 108 of our podcast, which is yet to be released, I examine the various costs of healthcare at all stages of life, from our working years to our last years.

The big takeaway? All the essential information is out there (e.g., on the Internet) and ready for us to consume, and the true cost of healthcare in retirement isn’t that bad.

Yes, Medicare has a cost. Yes, IRMAA can be an annoying additional tax. And yes, you ought to understand the cost of “long-term care,” should you or a loved one require it.

But that’s the point of a sound financial plan. It considers these costs and these risks and accounts for them.

The “Safe” Investment Trap

We’ve affirmed that too much risk can lead to a sequence of returns failure.

But a lack of risk can also cause trouble. “Safe” assets like cash and bonds risk, too. They might be safe from a “principal loss” perspective, but fixed-income assets suffer terrible spending-power losses from inflation.

Your retirement planning must involve assets with real (or inflation-adjusted) returns over time. If you play it too safe, your nest egg will be slowly consumed by inflation.

Missing a Withdrawal Strategy

Saving for retirement is a decades-long challenge. But too few retirees consider their withdrawal strategy. In other words, how will they construct their “retirement paycheck?”

Which accounts will your draw on first? In what amounts? What will the tax consequences be? Are you in a position to utilize some intelligent tax planning techniques (we’ll talk about that below)?

If you’re unsure, download our white paper: The Step-By-Step Guide to Building Your Retirement Paycheck

DIYing Complex Situations (Especially Tax Planning)

“We all have an obligation to pay taxes. But we also all have the right to not pay more taxes than we’re obligated to.”

That’s one of my colleague’s go-to phrases, and it’s perfect.

You can’t avoid taxes. But you can minimize them. One of the biggest problems I see from pre- and post-retirees is that they’re simply paying too much in taxes. Usually, it’s because they’re unaware of all the smart things they ought to be doing. They insist on doing it themselves, and “they don’t know what they don’t know.”

It’s real money, and it compounds over time.

You can work with a team of credentialed professionals to avoid these complex mistakes. Interested in learning more? Schedule a free call with Jesse to see if you’re a good fit for his practice.

Helping the Kids (or Grandkids) Too Much

There’s nothing wrong with a gifting plan to your kids or grandkids. In fact, you absolutely ought to look into it.

But it becomes dangerous when your gifting plan fundamentally erodes your likelihood of retirement success. Your retirement plan shouldn’t be the primary plan for college or a first house. There needs to be a safe balance.

“Deer in Headlights” Without Income

Many investors are unphased by market volatility during their working years. They think,

“I’m still working, still saving, still buying new investments every month using my income. I don’t care about this volatility.”

But in retirement, with the salary spigot turned off, many investors become “deer in headlights” during market volatility. They panic, freeze, and then dart off in a totally random direction, thrashing through the undergrowth.

Or, in investor terms, they do something stupid. Those mistakes add up.

Neglecting or Forgetting Their Estate Plan

Most retirees I speak with have some estate planning in place. They have a Will and usually a healthcare proxy and power of attorney, too. These are all essential documents.

But as you age, you need to revisit these documents. The standard frequency I’ve heard from attorneys is every 5 to 10 years. Such reviews and revisions are important no matter your age, not just for retirees.

Without those revisions, you might carry a risk that your current estate plan no longer accurately reflects your precise wishes, or that the stated distribution of your assets is simply suboptimal.

In review, the most common mistakes I see retirees making are:

• Ignoring or underestimating inflation
• Too much risk and not thinking about their sequence of returns
• Bad Social Security claiming decisions
• Spending too much or too little
• Misunderstanding their healthcare costs
• The “safe” investment trap
• Missing a withdrawal strategy
• DIYing complex situations, especially in tax planning
• Helping their kids (or grandkids) too much
• When the income goes away, they become a “deer in headlights”
• They forget or neglect their estate plan

What do you think? What am I missing?

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We’ll talk to you soon!