By Eric Reich
I often tell clients that when it comes to investing, the way up is a lot easier than the way down. On the way up, low-cost, well-diversified portfolios can help get you to the goal. In most cases, there aren’t a ton of other factors involved in achieving wealth. Retirement (the way down), however, is very different. This is when planning becomes crucial. This week, let’s explore a few of the areas of planning that may be a cause for concern for near-retirees.
- Underestimating costs
I cringe whenever I hear things like “retirees need 40-60% of their pre-retirement income during retirement.” While that might be true of latter-stage retirees (15-plus years into retirement), who have little retirement assets, it is certainly not true of good savers. The average retiree we see typically spends 100-120% of their pre-retirement income in the first few years of retirement! Why? Because now they have the free time to travel and dine out that they didn’t have before they retired. After a few years, the novelty of retirement can wear off and expenses may start to drop. Maybe you’ve taken bucket-list trips, paid for the weddings, etc. Then eventually expenses after 10-plus years into retirement may be lower, but only until the last stage of retirement when medical expenses start to rise. The point is, don’t assume your expenses in retirement will be lower. For many, this is simply not the case.
- Assuming retirement age
Since the early 2000s, the intended retirement age of the average worker has held steady at age 65. The problem is that, in none of those years, has the average age of retirement actually been 65. Instead, that retirement age fluctuated between age 58 (2005-2007) to a high of age 63 in 2021. At no point was the average age even within two years of age 65. This can present a major problem with your retirement plans. Two less years of working means two less years of savings and two more years of spending than intended. This problem therefore has a compounding effect. The No. 1 reason (34%) for early retirement was health problems. This was followed by layoffs (29%). While you might intend to retire at age 65, you need a contingency plan in the event that you are forced to retire early.
- Working in retirement
47% of pre-retirees plan to ease into retirement. The reality is that only 20% actually do. A full 53% never work again, and even those that intend to keep working part-time, only 6% of retirees actually do. More people retire than work full-time jobs (8%) then end up working part time.
- Early retirement leads to early Social Security claiming
The earlier people retire, the more likely they are to claim Social Security benefits before they attain Full Retirement Age (FRA). This can lead to a permanent reduction in fixed income throughout your lifetime. For some retirees, I advocate taking Social Security early, but for those with limited assets, this is rarely the case. 66% of new Social Security claims are made prior to reaching FRA, and only 12% wait beyond FRA to maximize their benefits.
Next week, we will continue this discussion of retirement pitfalls with a growing problem (no pun intended) of not taking IRA distributions until you are forced through required minimum distributions.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS, visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
