Dollars and Sense
A Dirty Dozen Retirement Bloopers: | |
|
By |
Today, retirement is not the beginning of the end; it isn’t even the start of the “homestretch”. With excellent prospects of much longer living, it is only the beginning of potentially, the most fulfilling one-third of your adult life. |
12 Retirement Bloopers !
They say the best time to plant an Oak (or Teak) tree was 20 years ago, but the next best time is now. Hence, it is never too late to undertake a thorough review of your situation to determine whether there is any need for changes to improve your future prospects.
The following is a list of a dozen retirement “Bloopers” prepared from personal and other advisor experiences. Once made, some mistakes are irreversible, but there are always ways to improve one’s situation.
1. Putting off Retirement Planning !
This very common mistake can leave you on the “doorstep” of retirement without a clue about what you are going to “do after work”, and with what resources. Given the long life expectancies now, many people could end up being “retired” for as long as they ever worked.
Most of us at one time or another pictured ourselves being retired and living on a tropical ocean beach drinking Pina Coladas under the palms. However, after 3 weeks or 3 months of this, most of us would be so bored with this life that we would have to start getting more realistic about what we are going to do for the next 25 to 30 years.
Another favorite plan is to retire to the Tropics and live adjacent to a golf course. Then one can happily play golf 4 or 5 times a week forever. After a year or 2 of this, your handicap should be well down and your game so good that you may be able to use the same little ball for several rounds to put into the same little cups. Is this enough of a life? Only you can make this judgement.
What are you doing “after work”? We all need to have enough physical and mental activity to stay sharp, healthy, and reasonably happy.
The next question is whether you have enough income to sustain your chosen retirement lifestyle.
2. Assuming Your Nestegg is Big Enough !
Got lots of Zeros in your various retirement account balances? And, you have just sold your valuable home in the frozen north. Great! But, just because it’s the largest sum of money that you have ever had access to, does not mean that it’s enough to sustain you after you factor in inflation (and taxes).
First, don’t be fooled by the prospect that you can live so much cheaper in retirement. Most need at least 85% of their pre-retirement income to support a good lifestyle. Is your nestegg large enough and invested well enough to continue growing faster than inflation; or are you taking all the interest and gains now to support yourself?
With inflation, you need to expect that your capital will have 30% less buying power every 10 years. And then, to maintain your chosen lifestyle, you may have to start drawing on your capital too soon causing it to shrink at an accelerated rate over time. Now, how long will your “nestegg” last? So what, you say! You are only going to live to 76 anyway. Think again!
3. Assuming You Won’t Live Long in Retirement !
This is a good news story that can be bad news to those caught unprepared. The good news is that in 1970, life expectancy at age 65 was to live to age 74 for men and 76 for women. Today, with biotechnology and medical breakthroughs, life expectancies are rising all the time. The bad news for the unprepared is that instead of having to support yourself for only 8 to 10 years in retirement, you may have to live off your savings for another 30 years or more.
Also, we know people whose last 10 years were very expensive with large medical, dental, and prescription costs, plus expensive outpatient support services. Those expecting government funding to be there to properly support the elderly 20 or more years from now, may be overly optimistic. Too late!
Don’t be one of those people so conservative with investments that they risk running out of money before running out of life! Break all the rules! Invest as if you’re going to live to 100.
4. Assuming That You Will Get More from Social Security and Medicare !
There are many that think “the government” will take care of them in their Golden Years. In fact, most people have ridiculously inflated ideas of how much Social Security is going to give them monthly. Whatever you think the amount is, divide by 3 and that’s probably what you are actually going to get. And, for how long?
To their credit, the American government is now actively debating the long-term viability of Social Security. Given the overwhelming certainty that once the huge Baby-Boomer population is all drawing Social Security, the system does not have the reserves and there will be proportionately more than 30% fewer people paying into the system than there are now. Thus, even with the prospect of paying off the national debt over the next 12 or so years, there is still a worry in the US about the long-term solvency of the Social Security system. Medicare could be in the same situation.
For Canadians, the current old age security amount is understood to be a net of about $4,000 US per year. It is also an unfunded system paid out of current tax revenues. When the huge “Boomer” population has retired and is drawing OAS, the system should become unsustainable. In addition, Canada now has a much higher national debt per capita and none of the political parties are committed to paying off the debt this century. How then can the Canadian Health care and social security systems possibly remain solvent?
Hence, perhaps it is time to start planning to be financially self-sufficient for the long term.
5. Making Emotional Decisions !
Many of us in our career got to the point after years of frustration with our jobs or the way the company was being mismanaged, that we walked into the boss’s office and quit prematurely. After taking a vacation for 3 weeks or so, it could hit many that they had just made the largest and most far-reaching financial mistake of their lives. And, it is going to be h--- to fix!
Dumber ones may be about to compound the financial problem when the second emotional decision is made to cash out their retirement account to use for vacations and a large new home in Paradise. More on this later.
A third common emotional decision being made is to realize that they will need to grow their “nestegg”, but become greedy and invest it all in a “get-rich quick” scheme, so available to the unwary. This will also be reviewed later.
As a wise man once said: If my life cannot be a shining example to others, at least let it stand as a glaring example of what not to do!
6. Having Excessive Expectations !
There are so many “opportunities” for the innocent and/or the greedy to “get-rich quick”. Most of them, however, could be unsecured loans or Ponzi schemes. Hence, they have not made an investment at all; but are simply gambling. Do you really need to gamble with your life savings? Think about the consequences!
We have also just experienced in the North American stock markets, a “get-rich quick” mania with the rush of “investors” to get in on the “next big thing” in the New Economy. The gross overspending in Tech and Telecom, and the Dot.Com mania just cost US investors about 4 trillion dollars.
Alan Greenspan had warned years earlier about “irrational exuberance”, but very few listened or acted with caution.
Wise investors know exactly what they are invested in and why.
7. Failing to Take Responsibility for One’s Own Finances !
Many may consult and work with a financial advisor to develop and manage their investment portfolio for the long term. This is a smart move. However, so many people simply sign over the management of their portfolio to an advisor and expect it will be taken care of. Really!
What if your advisor did not diversify your portfolio and, instead, was so enamoured with the Dot.com mania or the fast growing telecom sector that he (or she) “bet” your nestegg on these “next big things”.
Or, if you are of almost any nationality but American, and your advisor invested your nestegg only in local markets and currencies. Your losses to date relative to US investments in US dollars over the recent past could have cost you up to 30% in gains.
It is too easy, after the fact, to blame someone else, but what good will that do? Remember that it is your money and you are ultimately responsible. You have to get involved and get to know what you are doing and why. The first decision of a prudent investor should be to do one’s homework.
It is not unusual for people to do much research before they purchase a TV or an automobile. They often get Consumer Reports or seek out satisfied owners because they care enough to make a good asset purchase. But, for some reason, many people do not apply the same diligence to their investments, even when it involves a significant portion of their total net worth. Why?
The secret to having enough money in later decades of life is to stop making decisions as if you were incompetent or had one “foot in the grave”. Instead, maintain a youthful attitude toward your money forever. Don’t follow the old paradigm of shifting your investments from equities to bonds as you get older or you may end up old, and active but poor.
As the authors of MONEY FOREVER (1) state: Avoid the stock market entirely and your wealth will slip away just as surely as if you had bet it on a failed Dot.com.
8. Investing Only In What You Know !
There were people working in the telecom industry that took their previously diversified retirement plans and re-allocated them so that 90+% was in telecoms. When the sector slowed drastically last year, their portfolios were derailed and their jobs were also in jeopardy. How about the real estate agents who invest only in real estate? When the local market softens, as they all do sooner or later, their commissions become spotty at the same time their investment properties are not renting or saleable.
Sure, many of us who purchased homes in the 1960s, 70s and 80s saw substantial increases in value and made good money when the homes were sold. But, this may not be a profitable way to invest today.
Demographers and futurists have been seeing, and continue to project a steady decline in the market value of housing since it peaked in North America in 1989. Sure, there have been selected locations that have enjoyed a housing boom because strong new business activities have attracted large groups of people. But, when one looks at the demographics, the Baby Boom generation is much larger than the following much smaller population group. Now Think! Who is going to buy the very large number of homes owned by the Baby-Boomers?
It is even riskier in Costa Rica. It has been a Buyers market here for years. And yet, new residents keep buying lots and building. Developers are also building Condos at a rapid pace. Since the commercial real estate market is already in recession, the residential building boom here is starting to remind us of the last one in North America that went Bust.
9. Overspending on Housing !
It has been quite common for many people new to Costa Rica to rush the building of their dream home in Paradise, while they were still on a “honeymoon” with the country. Plenty of them have been “burned” by very substantial cost overruns. Months or years later, they also realize that far too much of their capital was spent on the new home.
In Costa Rica, for too many, real estate purchases have turned out to be true fixed investments (as in “White Elephant”). Hence, we advise newcomers to take lots of time to find out what it is really like and buy only what they can afford, or rent a nice place. Many of us are convinced that Real Estate should not be purchased as an investment.
10. Cashing In and Spending Retirement Plans !
Back to the tales of, what were you thinking? Many have cashed out a substantial portion of their retirement plans built up over many years, as soon as they retire, and spent much of it before realizing the tax implications of the decision. Of course, all that money in tax-deferred accounts will need to be ……taxed! Then, when tax time came around, many didn’t have the money and were forced to cash more of their retirement funds to pay. And, the vicious cycle continued.
However, those fortunate enough to have a significant total investment, and can legally get out of their tax systems (e.g. Canadians), can benefit financially by cashing all registered plans after they become non-residents of their home country. Of course, they must save a sufficient amount to pay the withholding tax, and then re-invest the balance to grow relatively tax-free for many years. The benefit is very substantial because of the power of compounding their gains over the long term.
11. Being Too Prideful About Part-time Work !
Many come to realize that they need more income than they planned on. But, they don’t want to take a $10,000 a year part-time clerical or service job because they feel overqualified or out of place. The hard truth is, you may have to work part-time to support yourself after you are “officially” retired.
It is also sad to observe a growing number of women who aren’t doing anything about their financial future. Maybe they are counting on someone else to come along and bail them out or take care of them.
12. Not Acknowledge Weakness in Financial Matters, Nor Seek Help, and Learn !
Acknowledge both your strengths and your failings. Don’t keep the details of any personal financial failures a secret from your family or from your financial advisor. Admit mistakes; mitigate them to the extent possible; then get on with life.
Many people have had little exposure to or a bad short-term experience in the past with stocks and/or equity funds. Stock market investments need to be made for the long term. However, it is natural to focus on the short term in times of market volatility and think that the current low market price is one that you are stuck with. Remember, the overall upward trend in market prices has been permanent for over 100 years, while all declines have been temporary.
In fact, the US and international stock markets have outperformed Bonds by a 4 to 1 margin since 1926 and a 9 to 1 margin since 1981. That’s performance! As one noted financial author stated, “temporary declines are created by markets, permanent losses are created by people”.
Now, are you ready to dare to be different? Then start thinking and acting in your own best interest for the long term. Don’t follow the “herd” and invest in something because everyone else seems to be. Make a point of learning about other investment options, such as equities. This can be stimulating and challenging, and also very rewarding over the long term.
Finally, let us compliment the financially successful women who may never have been involved with investing before their husbands were gone. To their credit, they decided to seek out sound advise; they listened; and they learned. The smartest ones didn’t “sweat the small stuff”, but stayed aware of what they were invested in and how their portfolio was doing.
In conclusion, not only in terms of finances, but also in a broader sense, in terms of enjoying the life change that is retirement, the biggest mistake you can make is to be inflexible. Even if some big mistakes were made people can usually make it through just fine if they stay flexible and resourceful.
MONEY FOREVER, Steven M. Pollen and Mark Levine, - AARP’s Modern Maturity Magazine, March/April 2001.
© El Residente ARCR Administración S.A. San José, Costa Rica N.B. Like all information on the internet, this article may currently be incorrect or out of date.
Costa Rica Information
Costa Rica Car Rentals
Costa Rica Restaurants
Regions, Provinces, Maps
Beaches of Costa Rica
Nightlife / Casinos
Tours & Tour Operators
Parks / Zoos / Reserves
Immigration
Businesses / Retail Stores
Vacation Recreation
About us / Comments<
HOME to 1 Costa Rica Link for Hotels, Resorts, Tours, Travel & Vacation Information
Copyright © 1998 - 2005