Randall Davey
You’ve done everything you’ve been advised to do so that one day you will step into retirement and travel the world. Estate planning portfolio? Check. Life insurance policies? Check. Income protection? Check. 401(k)s? Check. Real estate paid for? Check. Social Security? Future possible check! If you save what you are saving, and invest what you are investing, and you get market rates of returns from now until retirement and don’t suffer a major illness or a premature death, you are on track for a robust retirement. Right? That’s a lot of ‘ifs’, and they don’t allow for other things that could go wrong.
For starters, think about a lengthy illness or premature death. The first may rob one of earning years while the other robs one of life, leaving dependent survivors to possibly live on less than planned for an indefinite period. The longer we live, the greater the risk of needing assistance with two or more activities of living sometime between now and the day we die. Should you need the help, how will you finance it? Health insurance, Medicare and Medicare Supplement will not foot the bill. Should you require home health, assisted living, memory care or skilled nursing, the onus will be on you to pay the bill. [There are circumstances in which Medicare may pay for 100 days in skilled nursing].
Miscalculating the cost of living in retirement is another planning mistake. I have medical professional clients who earn upwards of $700,000 a year who are convinced they can retire on $100,000 a year. Sure, it’s possible, but probably not likely. One doesn’t go from whatever lifestyle you enjoy today to clipping coupons and buying day old bread later. Lee Eisenberg, author of The Number, [Free Press, 2006]. notes that people in retirement often consume between 80 to 120 percent of their final working year’s income. Yes, the kids are gone, but now you may choose to help adult children purchase homes, pay off school loans or help grandchildren pay for college. Further, your tastes and preferences don’t change overnight from Ruth’s Chris to Denny’s.
Underestimating a future tax liability can also be a looming iceberg. A 40-year-old dentist who wants to retire at 50 is plowing $6,000 a year into a 401(k) primarily because he hates to pay taxes. Note that this is a strategy to defer tax with no assurance that taxes will be less when he is eligible to draw the money out. By the way, should he retire at 50, he will be locked out of these dollars for several years unless he opts to incur a penalty. The even greater concern is the popular assumption, “When I retire, I will be in a lower tax bracket.” Don’t take that to the bank. While this may be true for many Americans, it may not be true for more highly compensated Americans.
Unrealistic expectations of market returns can throw a wrench in your plans. One doctor of dentistry said, “If I average 10 percent on my investments through my working years, I’ll have plenty of money on which to draw.” If you are banking on a 10 percent rate of return ad infinitum, check out the Darbar Group’s Quantitative Analysis of Investor Behavior, https://www.dalbar.com/News/InTheNews]. They track equity investors’ actual rates of return, and the results may surprise you.
Insummary,knowyourrisks.Mitigateyourrisks.Defusepotentialbombs.Stopsittingon yourassets.Call, text, ore-mailto schedulea30-minute conversationtodiscussthese criticalconcerns.
Randall E. Davey,CAP®is afinancial advisor with Guide Advisors, Inc.In certain circumstances, he mayoffer insurance as a sole proprietor or through Guide Advisors, Inc. Heresides with his wife, Bonnie inMesa, Arizona.Randall can be reached atrandall.davey@guideadvisors.comor by phone at 425.478.5668.
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