You’ve heard it and read it everywhere: the #1 fear people have in retirement is running out of money. That isn’t news to us anymore and it remains the #1 fear for retirees today. What is news to us, however, are ways in which you can prevent it from happening to you.
So, to help you prevent this fear from becoming your reality, I’ve put together a list of 5 huge mistakes that you MUST avoid before it’s too late (after you discover the 5 mistakes below, you’ll also want to check out these 4 retirement rules that you must STOP believing.)
1. You rely on one source of income to meet all of your retirement goals.
You know the saying, “two is better than one,” right? Well, in the case of retirement, this saying could actually save your (financial) life. Imagine if you had the choice between using one cup or several cups to drink out of for the rest of your life, and for some crazy reason you chose to go with just one.
Now, imagine a few years later accidentally dropping and shattering that cup (which we’re all guilty of at one point or another). Now what? You can’t reach into the cabinet for another cup to rely on, because you chose in the beginning to just go with the one. I know this it isn’t the absolute best comparison, because a cup is much more replaceable than your money, but that is the very reason you need to take this seriously.
Cups are replaceable; your money is NOT. It’s a little crazy to think that someone would choose just one cup to rely on for the rest of their lives if they had a choice, right? Well, it’s even crazier to think that someone would choose just one source of income to rely on for the rest of their lives and hope it’s enough. Odds are, it isn’t.
You need to make sure that you diversify your portfolio and set up multiple income sources for retirement, so that you create a stable and guaranteed plan to have every single one of your retirement goals met. You can’t rely on just one source of income to do that for you. That is just as risky as putting your whole life savings into stocks.
An individual income stream is weaker when it’s standing alone—it’s like a bridge that was never fully built and may or may not collapse. But when you combine your individual income sources together the right way, it can create the strength and power equivalent to the Golden Gate Bridge. Tell me… Which bridge would you rather walk across?
2. You’re investing too much of your portfolio in stocks… But then you’re not investing enough of your portfolio in stocks.
Sounds confusing, right? Of course it does. One person is telling you you’re risking too much with stocks while the other person tells you you’re not risking enough with your stocks! Which person is right? Well, the short answer is, they both are.
Sure, stocks are risky. We all know that, and most retirement planners advise against them completely. I don’t always agree with that approach. It depends on the person’s unique situation, of course, but sometimes investing in stocks in retirement could be a good thing.
With the volatility of the market, it would make sense that you’d want to transfer your money to a safer vehicle and preserve your wealth. That might not be the best move for you, though. Not completely, at least. It could be a good idea for you to allocate a safe portion of your money to stocks to allow it to continue growing during your retirement years.
Like I said, it’s different for everyone, but a good rule of thumb is to transfer no less than 60% of your stocks into safer vehicles as you head into retirement, then cut that allocation down to 40% during the early years of your retirement, and then down to 20% in the later years of your retirement. Another great way to look at it is Don Blanton’s Personal Economic Flow Model, which is one of the best tools for regulating cash flow.
3. You or your spouse unexpectedly get sick and you didn’t financially plan for it ahead of time.
This is never a fun topic to discuss, but it’s an essential one. When one’s health takes a turn for the worse, their wealth can go right down with it. In fact, healthcare costs are rising and it’s something you need to be aware of. If you were smart, you would plan accordingly for this.
Of course we hope that you never have to face any type of illness, but it’s better to be financially prepared for the possibility of it happening than to take the huge risk of hoping it doesn’t. I’ve seen it happen far too many times where people get hit with huge medical bills in retirement that aren’t covered by Medicare or private insurance. So, they have to deal with the financial stress on top of the stress of being sick.
When your health is compromised, it’s an emotional weight to carry in and of itself. Adding financial stress on top of that is NOT something you should have to ever worry about, and you don’t need to if you just plan accordingly! If this unfortunate scenario presents itself, the only thing you should be focusing on is getting better and trusting that the financial side of it is taken care of. But it will only be taken care of if you set it up that way ahead of time. You need to be proactive before it’s too late.
4. You live longer than you planned.
Ok, this obviously isn’t a “mistake,” but what IS a mistake is not planning for a longer life. That’s a huge mistake, actually. I’m sure you’re not “planning” on how long you’re going to live, but the threat of outliving your money is a very real one that you need to consider. That is especially true in this day and age when the average life expectancy continues to increase. Of course this is a great thing, but it also means more essential planning on your end.
On top of that, you will also want to consider planning even further down the road after you pass away. If you want to ensure your heirs are financially secure and don’t need to worry about a thing, that is something you’ll want to have in place immediately.
To keep it simple, plan for a longer life and make sure your income keeps up no matter what. There are plans out there than can give you the guarantee and safety of income for life, such as the Guaranteed Lifetime Investment (GLI). Ask about the GLI and other plans today to see which plan would be the best fit for your situation.
5. You dip into the wrong account at the wrong time.
The consequences of this mistake may not be as detrimental as other ones, however it can cause you to lose a large portion of money and pay more in taxes than necessary. There is actually a term for this. It’s called the “tax torpedo” and, trust me, it is not something you want to get yourself caught in. It could cause irreversible damage, which is why you need to have a smart withdrawal strategy in place to prevent it from happening to you.
Without diving into the details (that’s a whole separate topic), a good rule of thumb for most people is to withdraw funds from your taxable accounts in the earlier years of retirement, then dip into your tax-deferred accounts next, and save your tax-free accounts for last. Setting up a withdrawal strategy the right way—tailored around your personal situation—could save you a TON in taxes and give you more income down the road.
Nobody likes paying taxes as it is, so why would you voluntarily put yourself in a position where you are forced to pay MORE than you actually need to? All because of one wrong move? It’s not worth it. You should also check out how the QLAC can reduce your taxes in retirement, as well as how to minimize the taxes you owe on Social Security.
Retiring is one of the happiest moments in a person’s life, but it can be equally as stressful with all the “rules” and things to avoid and what not. It doesn’t have to be a stressful process for you, though. Remember that you don’t have to do it alone.
There are people who have dedicated their lives to figuring all of this out for you, so that you don’t have to stress about it when the time comes. That is one of the biggest reasons I’m so passionate about educating people, because I know how stressful it can be, and it is my goal to alleviate that in any way I can.