Top Four Financial Mistakes Retirees Make

At this point I have done hundreds of retirement plans, and there are a few conversations I have on a routine basis when meeting with clients in retirement.  Here are the top four financial mistakes I see retirees make.

Having Too Conservative Asset Allocation

There is plenty of literature documenting an increase in risk aversion as people age.  This typically results in objectives changing from growth to capital preservation and allocations changing away from stocks and toward bonds.  The rule-of-thumb stating that your allocation to stocks should be 100 minus your age shows this clearly.  (For the record, I’m not a fan of that rule-of-thumb. At least to whatever extent one can be a rule-of-thumb fan.)

More often than not, clients who reach out to me who have been DIYing their financial plan and investment management and are at retirement share this in common.  They have an overly conservative portfolio allocation.  

I hypothesize that this is because the fear or running out of money is less abstract than the fear of missing out on additional gains or not being able to leave a larger legacy.  But for many, the fear holds too much weight.

Oftentimes, I find that clients can tolerate a more aggressive asset allocation without materially increasing their risk of running out of money.  The median ending value of a more aggressive portfolio in general will exceed that of a less aggressive one when looking at a long time horizon.

If retirement is lasting 30 years or longer, many of the dollars will not be distributed for spending until at least a couple decades from now.  They, therefore, have greater risk capacity.

Having a realistic understanding of how one’s portfolio may perform in a down market while distributing funds oftentimes permits the investor to take additional risk.

Underspending

This is related to being too conservative, but it has more to do with the expenses category as opposed to the asset allocation decision.

The value of one’s nest egg at retirement becomes a mental anchor.  Often, clients begin to worry when the value of the nest egg drops below what it was initially upon retirement.  As a result, many retirees will limit their spending too much in a down market.  Conversely, they do not increase their spending accordingly in an up market.  

The way this plays out over time is that the nest egg continues to grow through retirement.  Most people wouldn’t state that their primary goal is to leave as much as possible to their children (although some do).  However, many behave as if that is the case.  It is a fear response.

Our job as financial advisors is to maximize the utility of money for our clients.  For some that means creating the largest possible inheritance.  For others, dare I say most, it means maximizing spending during their lifetime.  I also frame it as aiming to “bounce the last check.”

I find that education and asset projections often give retirees the permission they need to feel comfortable spending more thus increasing their life satisfaction by viewing money as a tool and not a limiting factor.

Not Looping in Kids Earlier

I tell my clients there are only 3 outcomes for their wealth: spending it, gifting it while they are alive, or leaving it as an inheritance or gift at death.  Whether through action or inaction, they are choosing which of these outcomes is their desired end.

Many clients will tell me that they are not concerned with leaving a large inheritance, yet they hesitate to spend any of their retirement assets.  The de facto result is that we plan on how best to leave dollars to children.  

Getting investors to choose to give money to their children while living can be very challenging.  Honestly, it may be the hardest part of my job.  If however the children are going to get the funds now or later, we should aim to pass wealth in the most efficient way possible.

Under current SECURE Act rules, an inherited IRA must be emptied by a nonspouse designated beneficiary within 10 years following the year of death.  That means those dollars may continue to get tax-deferred or tax free growth for up to 10 years.  What if instead, those dollars were gifted today and used to max fund a child’s 401(k) account?  Those dollars could then enjoy more favorable tax treatment for much longer than just 10 years following death.

I’ve found that often it is the conversation between parent and child that is the stumbling block.  I have facilitated a number of these conversations.  It becomes an opportunity to both perform quality planning and to create a setting where values around money can be passed from parents to children, which I would argue is the larger benefit.

There is also the pragmatic benefit of having all the estate documentation in place appropriately and having all the children on the same page so there is no surprise or infighting that occurs following death due to miscommunication.

This conversation is best facilitated long before any signs of diminished capacity or an unexpected health event.  In other words, do it now!

Not Following Through on Estate Planning

I hesitate to write this because how elementary this advice is, but I have seen it often enough, I feel obligated.

Many clients DO execute thorough, well-written estate documents with the help of their estate attorney.  Fewer take the follow up steps necessary to make sure those wishes become reality.

It is not uncommon for me to find out a prospective client has a trust, but no assets have been transferred into the trust.  Neither has the trust been named as a beneficiary on any account or asset.  That trust is just a sheet of paper at that point.

Sometimes this is due to a misunderstanding where the retiree thought the estate attorney handled that.  Other times, they just haven’t gotten around to it.

If you have set up a trust, make sure to retitle the appropriate accounts in the name of the trust or you add a Payable On Death designation to the named account.  Update beneficiary forms or execute a quit-claim deed.  Without these, the trust loses some or all of its purpose.

Make sure everyone knows where the will/trust document is located.  Give POAs to the appropriate people or organizations.  These are the minutia that you don’t want to be worried about in the case of a loved one.

I hope this is both informative and provoking so that you can avoid these mistakes.  I have seen them too often.  One book that shaped how I view spending in retirement with my clients is Die With Zero by Bill Perkins.  Make sure you design an appropriate portfolio, spend accordingly, loop your children or other beneficiaries in and follow through on your estate planning!