3 Biggest Mistakes Retirees Make & How to Avoid Them

Retirees are making three mistakes that could jeopardize their financial future, experts say, with the missteps coming amid a growing awareness that many workers who’ve saved diligently for decades are now struggling to spend their savings.

What’s driving the mistakes? Christine Benz, director of personal finance at Morningstar, points to the uncertainty around the retirement time horizon. Juggling finances is complicated, she says, because forecasting life expectancy—let alone market behavior—is impossible.

The good news is that these mistakes can be remedied. Here’s how:

1) No written plan

Only 12% of retirees currently have a written plan, according to a 2018 survey from the Transamerica Center for Retirement Studies. An additional 42% have a plan, but it’s not written down, and the rest have no plan.

Catherine Collinson, CEO of the Transamerica Center, says this is probably the biggest mistake retirees make. A written retirement plan can provide a roadmap to balancing income, investments, and expenses—both needs and wants—and can help retirees navigate the finer financial points of this life stage. (The Transamerica Center for Retirement Studies is a division of Transamerica Institute, a nonprofit, private foundation funded by contributions from Transamerica Life Insurance Co.)

As for drafting a comprehensive plan, both Benz and Collinson say working with a financial advisor or wealth manager is worth the cost, even for people who want to manage their own investments in retirement.

“It can be so involved to try to take it on one’s own when professional advisors work with hundreds if not thousands of clients. They have had the experience to see how things play out in reality and they can be a very valuable source of knowledge,” Collinson says.

Benz says do-it-yourself investors can hire an hourly financial planner for a consultation. Investment firms that are popular with retirees such as Fidelity Investments, Charles Schwab, or Vanguard Group often offer services of certified financial planners for various costs. And in some cases, if the retiree’s assets are substantial enough, the advice may be bundled in free.

In addition to ongoing living expenses, Social Security and Medicare benefits, a comprehensive plan should map out:

• Needed investment portfolio returns to make up any shortfalls from other income sources to maintain expenses
• Overall tax planning and how to tap assets tax efficiently
• Inflation assumptions
• Health-care costs, including any long-term care risks

2) Not managing sequence-of-return risk

In a good stock-market environment, retirees trim appreciated positions to bring in cash flow and reduce portfolio risk, Benz says. But tapping equity positions in a down market locks in losses.

This is sequence-of-return risk, and when retirees mismanage the order in which their returns occur, they often have to reduce their withdrawals or lower their standard of living to avoid running out of money.

Benz says the bucket approach of spreading out assets into short-, medium-, and long-term holdings can help mitigate sequencing risk. She gave an example of a sample portfolio of a retiree spending $60,000 annually from a portfolio.

• Bucket one: holds $120,000 in highly liquid assets to fund near-term living expenses for years one and two, such as a certificate of deposits or money market accounts/funds.
• Bucket two: holds $480,000 in an intermediate portfolio for years three to 10. Put $100,000 in a short-term bond exchange-traded fund, $150,000 in a short-term U.S. Treasury Inflation-Protected Securities ETF and $230,000 in a core U.S. bond fund.
• Bucket three: holds $900,000 in a growth portfolio for years 11 and beyond. Put $350,000 in a dividend growth ETF, $225,000 in a total U.S. stock market index ETF, $250,000 in international ex-U.S. all-world ETF, and $75,000 in a high-yield corporate ETF.

Not everyone has $1.5 million in retirement savings, but the idea is that a sample portfolio holds 8% is in liquid assets, 32% in bond funds and 60% in stocks. Benz says this sample portfolio builds a bulwark against a bear market in stocks. “If it materializes, then you have those funds to draw upon first before you need to touch your equities,” she says.

3) Not taking the right risk

Retirees may be setting themselves up to fail with inappropriate risk—either having too much low-yielding fixed income or having too much in stocks 10 years into the bull market. There’s no one-size-fits-all answer for the appropriate balance as much depends on income needs, but there are some rules of thumb.

Nancy Anderson, head of wealth strategy and trust services for Calamos Wealth Management, says when she formulates an investment plan, she asks retirees how much income they need for the lifestyle they want, the assets they have, and whether they want to leave a financial legacy or spend down their assets. She starts with these goals and backs into the appropriate asset allocation to produce the needed investment return from the portfolio to cover any gaps in income.

For example, she and a client may base the risk allocation on such goals as “I don’t want to sacrifice my principal,” or “I just want $3,000 a month in income.” “Based on that risk goal assessment,” she says, “we would develop an asset allocation that would probably be adjusted at a minimum annually to make sure we have the right type of asset.”

Depending on the retiree’s income needs, if total income needs can’t be covered by Social Security and investments without taking on aggressive risk, a retiree may have to look for an alternative income stream which may include part-time work.

Benz says using desired cash flow as a starting point for positioning usually ends up with a retiree having an asset allocation of 60/40 or 50/50 stocks/bonds, rather than the previous mix of strictly fixed-income.

“There was always this idea that you didn’t want to necessarily be in equities when you’re retired, but it seems to be more like a 60/40 portfolio is still probably a good idea, even in retirement,” she says.

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