The definition of retirement is evolving. Advances in technology and healthcare have contributed toward longer life spans and in turn, a change in retiree habits. From working longer to living a more active lifestyle, a dramatic shift has begun. Rather than think of this phase as retirement, we prefer to view it as planning for “life after work”. Today’s retirement requires a more dynamic approach to planning to help address longer life spans, higher living expenses and unforeseen health care costs. Consider addressing the following retirement roadblocks to help improve your ability to pursue your retirement goals.
Retiring with debt
Is it realistic to expect to pay off substantial debt and maintain your lifestyle – all while you are no longer working? Of course, not – yet so many retirees carry a substantial debt burden with them into retirement. According to the Employee Benefits Research Institute, 56 percent of retirees retire with debt. From home equity loans and mortgages to credit cards and student loans from children, addressing your debt before retirement is critical. Transitioning into retirement with as little debt as possible may free up precious cash flow that can be applied toward other important living expenses. Consider taking a pro-active approach to addressing your debt – even if it means that you must downsize your home or other assets to eliminate debt levels before retirement.
Excessive discretionary spending
It often takes the average retiree a few years to settle into their retirement lifestyle. During this time, many retirees find themselves actually spending the same if not more on discretionary expenses they hadn’t had the opportunity to focus on while working. Travel and entertainment are just a few of the expenses that often increase during the retirement years, forcing many to realize the difficulty in maintaining the same level of expenses when employment income has stopped. Remember, it is the not what you have from an asset perspective, it is what you need those assets to do for you that matters. Even the wealthiest savers can outlive their money if their spending is excessive so be extra careful to monitor this area and adjust expenses to keep yourself on a sustainable path for the future.
Financially supporting others
It is incredibly difficult to be financially independent when others are financial dependent on you. From adult children that have returned to the nest to aging parents that need financial assistance, being financially responsible for others during retirement can take its toll. While financially supporting family may be critical, it is important to avoid overextending your financial support to the detriment of your personal long-term financial goals. Taking steps to protect against this may help prevent you from being in a position where you become the one who requires the support later.
Being too conservative/aggressive with your investments
Finding the proper balance of risk within your portfolio is not easy. After all, being too conservative may not get you to your destination and being too aggressive may subject your portfolio to wild swings that could compromise your goals. As many people know but often fail to recognize when it is happening to them, the markets are also exceptionally good at manipulating investor behavior. When markets are rising, the fear of missing out can cause some investors to take on more risk than they should. Alternatively, market crashes have the opposite effect, leading some investors to suddenly want to be more conservative than their goals would dictate. According to DALBAR, the average investor underperforms the market by nearly 4.66 percent simply by trying to “time the market”. Rather than allowing the market to determine your allocation, consider bringing your portfolio into alignment with your life by establishing a comprehensive Financial Life Plan.
Underestimating health care costs
According to Employee Benefits Research Institute, the average American couple will spend nearly $240,000 on future medical care during their lifetime. From health care costs to assisted living/nursing care costs, retirement budgets often fail to account for exponentially increasing health expenses. Depending on your circumstances, it may be advisable to phase-in higher health care expenses as you age while also running scenarios that include the need for assisted living or nursing care. While transferring these risks to a third party by utilizing insurance can be helpful, increasing insurance costs may necessitate more creative approaches in this area.
Living longer than you planned
Living a long, fulfilling life is what many retirees strive for. However, some underestimate just how long they will actually live. According to the Centers for Disease Control and Prevention, average life expectancy for a man and woman who turned age 65 in 2014 is 83 and 85.5 years respectively. Keep in mind that these are averages and the probability of living beyond those ages are increasing over time. Advances in health care have led to longer life expectancies and in turn, additional financial strain for those that underestimate how long they need their financial resources to last. Do you have a financial plan that will provide income in the event you live beyond life expectancy? Do you have diverse income sources to produce what is needed to maintain your lifestyle?
From family and friends to travel, hobbies and volunteering, retirement is a time to focus on the things that are most important in your life. While there are many roadblocks that can derail the pursuit of your goals, detailing and monitoring a plan to overcome these challenges can help. Since everyone’s situation is unique, consider speaking to your financial adviser to determine the most appropriate approach for you.