James Canal (0:00)

One of the saddest things I see as a financial advisor is people have been saving their whole lives, but they fail to turn those savings into peace of mind, and they live a retirement that's far less ideal than it otherwise could have been. And what I also have noticed is that in these instances, it's typically because of one of five core mistakes that people end up making with retirement. So what we're going to do on today's episode is talk about the top five most avoidable retirement mistakes, as well as what you need to know to protect against them. This is another episode of Ready for Retirement. I'm your host, James Canal, and I'm here to teach you how to get the most out of life with your money. Money. And now onto the episode. And now with this video, we could talk about things like the tax strategies people miss or collecting Social Security at the wrong time. But some of these mistakes come down to not knowing in advance what's going to happen. And there's a lot of complexity to some of these actual strategies. Today, what we're going to focus on is things that are easily avoidable, things that all it takes is more information or the right information so you can understand where to look and what you can do to avoid some of these mistakes. The first most avoidable mistake I see people make is they spend the wrong amount. Now, the wrong amount could be too much or it could be too little. If it's too much, well, we all know the risks of that. If you spend too much from your portfolio too early, you're not going to have a portfolio for that long in retirement, and you're ultimately going to run out of money. You're going to be forced to live on just Social Security or just a pension or whatever you have. But that's a mistake. Now, here's the thing. If you're spending too much, that's a very avoidable mistake. There are some very basic rules you can look at to say how much income can your portfolio sustainably support for you? And how much income do you ultimately need to supplement things like Social Security or things like your pension to get to where you want to go? So that's a very avoidable mistake. But the reality is actually this. For every one person I see spending too much in retirement, I probably see 10 or more people spending too little. And that's simply a fact of people who are well prepared for retirement have this mindset of save and invest and defer, and they live beneath their means. And then one day they get to retirement and that mindset continues even when their portfolio could have supported a lot more income. And what it ultimately means is they miss out on experiences that otherwise would have brought a lot of purpose or enjoyment or fun to their retirement. So part of this is just identity driven. They've been frugal, they've been people that don't overspend, they've prioritized savings. And that identity is tough to switch off as soon as you retire. But a part of it is also just fear driven of the fear of running out. What if I do spend too much? What if there is a big market downturn? What if things do happen that are outside of my control and that fear prevents them from doing some of the things that they otherwise would have loved to do? So how do you spend the perfect right amount? Well, I'll say this. It's hard to pinpoint the exact amount that you'll be able to spend in retirement because we don't know what the market's going to do or living expenses or inflation. So for clients, what we like to help them do is we like to help them understand the upper limits of what they can sustainably spend. That's not to say you need to spend that exact amount, but it's very helpful context to know. Here's the most that you could potentially spend before we as your financial advisors would start having some pretty serious concerns about the longevity of your portfolio. Oftentimes we'll get pushback on this, not because people don't know of things that they could spend money on, but that fear drives a lot of decisions of they don't want to spend more. They have this fear of what if they're going to run out? And what we have to remind them of is there's also going to be this sense of regret. Yes, fear overspending. Have a healthy fear of making sure that you're being responsible with how much you're spending so you don't outlive your portfolio. But at the same time, we have to have a healthy fear of I don't want to do something today that I'm going to end up regretting 20 or 30 years from now. Or maybe better put is I don't want to not do something today that I'm going to regret having not done. When I look back on my life, what's an example of that? Was there a trip you could take with your family? Is there a fun sporting event or concert or something that you can spend money on today that will create an experience that you'll look back upon with fond memories for the rest of your life. Are there things you can do with your money today that don't just amount to wasteful spending, but add in a meaningful way to your overall quality of life? That's the balance we encourage people to find of. Yes, it's be responsible and prepare for the future. But also, far too many people are underspending. They're saying no to things that otherwise would add to their quality of life because of this fear of running. So the most avoidable mistake is people spend the wrong amount, either too much, but more often it's too little because they don't have the proper context of what they can safely spend both today and in the future. The second most avoidable mistake I see retirees making is they retire at the wrong time. Now, here's what I don't mean by that. I don't mean they retire in 2007 and then a 2008 happens. That's not an avoidable mistake because you can't control it. And by the way, the impacts of that can largely be negated through structuring your portfolio the right way ahead of time. I'm talking about retiring earlier than you should have or later than you should have based upon your plan. So this is very similar to the previous point. If you retire too early, that's going to lead to you maybe not having a large enough portfolio to cover your income needs in retirement. It's going to perhaps lead to a lower Social Security benefit or more years before Social Security kicks in, that your portfolio has to fully support all of your income needs. Maybe it leads to higher medical expenses. Maybe it leads to more years of needing your portfolio to fully support you. So whatever the case might be, if you do retire too early, there's very real consequences for that. And a message that we often preach on this podcast and this YouTube channel is we want you to fully enjoy your life. We want you to view your portfolio as a tool to do that. But we don't want to be naive about that. We don't want to say retire too early, spend too much, do too much, because we cannot afford to run out of money. We cannot afford for our plans not to take us to the end of our lifetime. We cannot afford to meet all of our goals both today and in the future. So that's something I want to make very clear, that you can absolutely retire too early, you can absolutely spend too much. You can absolutely spend yourself into something that you're ultimately going to regret in the future. But there's also the Sense of. In the same way that we can retire too early, we can also retire too late. Now, too late. What does that mean? It doesn't mean it's going to hurt you financially. The longer you keep working, the more your portfolio grows, the more you save, the more you maximize Social Security. And there's tremendous benefits to that. But we always have to keep in mind that the goal of retirement planning isn't just to maximize that. If you go to your grave with a gigantic portfolio that you never got to spend because you worked too long, that's not a successful financial plan. I don't care how many millions are in your portfolio the day you die, you're not going to look back and say, I sure am glad I worked till 70 or 75, because look how big this portfolio is. You're going to look back with regret saying, why did I work so long? Why did I sacrifice so many years of my life? Not just so many years of my life, but the healthiest years of my life, when I could have retired a bit earlier because I had the means to do so. But instead I let fear drive my decisions or I let uncertainty drive my decisions. If I didn't know what I would do in retirement. So it's easier to say, you know what, I'll stick around to work for one more year. Because you know what, by the way, I'm going to get one more bonus or one more stock fest or one more whatever it is. And we keep pushing the goalposts back, and at the end of the day, we end up missing out on the things that ultimately bring the most richness to our retirement. So a mistake I see people make is retiring at the wrong time. Sometimes it's retiring too early and it costs them dearly in a financial way. Many times it's retiring too late and doesn't cost them financially, but it costs them from the standpoint of what their life can ultimately look like and the events and the things and the memories that end up passing them by. The third avoidable mistake is people focus on only one type of investment risk. So if I were to ask you right now, what comes to mind when I say risk in your retirement portfolio, what would you say? Well, without even saying it out loud, you're probably thinking something like, okay, a 2008 type market, a 20, 22 type market, where the market drops double plus digits, and that really takes a chunk out of our portfolio. So that's one type of risk. Now, some of you, you've been doing your reading, you've been Doing your homework. You've been watching this channel and say, well, James, it's obviously not just stock market risk, its sequence of return risk, it's the sequence in which we receive those returns. Those are big risks. But there's a gigantic risk that not enough people focus on. And that's the risk that our portfolio isn't going to be able to maintain its purchasing power over a 30 year retirement. So let's illustrate what I mean by that. Let's assume that you retire and you know that you're going to have 30 years ahead of you. If your expenses to use a round number in retirement are $100,000, disregard the actual number. Plug in a number that works for you. But $100,000 of expenses by the time that you are 90, assuming you retire at 60 or 95, and you retire at 65, if you still have that $100,000 of expenses, it's not truly going to be $100,000. It's going to be closer to $250,000 to still maintain the same lifestyle that you could live with $100,000. Now, we know your expenses at 95 aren't going to be the same as 65, but the point being, the cost of your expenses, the cost of groceries, the cost of energy, the cost of transportation, the cost of clothing, all of that is going to double or triple or more over the course of your retirement. So if we get so hyper focused on stock market risk, which is really just volatility, and volatility, if we look at history as a guide, is really a short term risk. Short term doesn't always feel short term. Short term can be 6 months, 12 months, 24 months, maybe even more. But it's always something that is passed with a passing of time. Meaning, yes, there's a lot of risk and your money dropping 20%, 30%, 40%. But if you give that enough time, historically speaking, if you're well diversified in your portfolio, that's going to recover and then some. So that volatility has always been temporary. Even sequence of return risk can be mitigated with the right portfolio management strategies. However, what you can't recover from is being too conservative, having too much of your assets in conservative stable investments early on in retirement, and then as inflation grows, your purchasing power doesn't grow with it. So yes, you need to be mindful of how stock market volatility, how sequence of return risk will impact your ability to meet your retirement needs. But if those are the only risks you focus on, you're going to miss the bigger picture risk, which is your ability to maintain your lifestyle, not just year one or year two or year three or year four or five of retirement, but even in years 20 and 25 and 30. That's where understanding how different assets and different investments have different roles in your portfolio take care of you today, but also to ensure you're going to be okay in the future. The fourth most avoidable mistake I see people make in retirement is they provide too much support for their adult children. Now, here's the catch with this. They don't just straight up come out and say, james, you know what? I want to pull money out of my portfolio to support my adult children. They say it differently. In fact, it oftentimes looks like they're justifying an investment decision. The conversation might go something like this. Hey, James, I want to pull some money out of my portfolio to invest in real estate. Say, wonderful. Let's talk through it. We'll talk about where they want to buy. We'll talk about how much it's going to cost. We'll talk about all these different details, and I'll finally say, how much do you think you might be able to get if you rent that property out? They'll say, rent? Oh, no, James, we're not going to rent it out. We want our children to be able to live there. We want our children to be able to live there because that's where they're going to go to college and that's going to support their ability to do so. Or we want our children to live there because you know what, they're just trying to get a leg up in life, and this is going to give them a place to live while they get their bearings, while they start building their financial future. So nothing necessarily wrong with that, as long as we call a spade a spade. If we try to justify this as an investment, it's probably a pretty horrible investment. A big part of the return that comes from investment real estate, and I'm just using real estate as an example. Here is the cash income that you're receiving from it. So if you're receiving no cash income or significantly lower cash income than you otherwise would have if you charged market rates, that's not going to be a great investment. Let's talk about what that is. That's a liability for you that you're using to support adult children. Now, I'm not saying that's automatically a bad thing, but what I am saying is that if you can't afford that and so you justify it as an investment when in reality it's a liability and it's support for adult children that can ruin financial. And I've seen that happen. And like I said, it's not always an investment, it's not always real estate. Sometimes it is straight up cash, sometimes it is. You know what, this is a one time expense. You know what, this is a one time thing. I'm going to help my children send their kids to the right preschool. You know what, this is a one time expense. I'm going to buy a vehicle for my child. You know what, this is a one time expense. I'm going to provide them funds for down payment. Again, I want to be very clear. Nothing inherently wrong with that. That can be a wonderful thing to do. I encourage that. When gifting and family support is a part of your overall financial strategy and this is the big and, and you have the means to do so. But when you don't have the means to do so, when you can't afford it, you can't do this and just magically hope. But your portfolio generates more income or grows bigger so that it can also support your needs throughout retirement. Take a very sober minded look at this to say, what is the primary goal? First and foremost, do you have enough money in your portfolio or your strategy to support that? If the answer is yes, and there's excess, then this can be a great thing to do. But my main point here is don't ever let yourself justify this as an investment, because we tend to do so because it's harder for us to just come out and say, I'm doing this to support my adult children even though I know I can't fully afford to do so. And then the fifth most avoidable retirement mistake is not having a strategy. Retirement can be so overwhelming. How much do I need? How much is it going to cost? What are we going to do? What are my days going to look like? What's my tax strategy? Where do I pull money from? When do I collect Social Security? All these questions can become incredibly overwhelming. And because of that, you would think that that'd be all the more reason to develop a strategy. But many people just stuff that away. They stuff this away, say, I don't want to think about it, I'm just going to go into retirement if I can build a big enough portfolio, if I can work enough years, if I can put enough away. And instead of developing a plan and a strategy, they go into retirement thinking, I'll just figure it out as I go. Now, to some of you that sounds absurd and to some of you, you say, yeah, that's me. It's easier just to say I'll figure it out as I go than it is to actually think ahead of time, to think strategically about what do I want my retirement to look like? How much will it cost? When I add up all the costs of basic living, plus travel, plus the things I want to do, what's that going to cost for me to be able to do this? How much of that cost will be covered by things like pension or Social Security or other income sources? What's the difference between all that? Is that difference going to be able to be supported by the retirement portfolio assets that I have? What about my tax strategy? How should I invest? So those are the types of things that a good strategy should be answering. But those things can also be overwhelming. But here's why you need to have a strategy. Maybe you have enough investments and you already know that, but you don't have a tax efficient withdrawal strategy, so you end up with less than you otherwise would have. Or maybe you have a pension, but you choose the option that ended up with less in lifetime benefits than the alternative because you didn't do the strategic planning ahead of time. Or maybe you sacrificed some of the things you really wanted to do upfront because you weren't fully confident that your portfolio could support that. But then you're going to wake up one day regretting that you didn't do those things that would have added to your quality of life. Or maybe your portfolio is full of Morningstar five star funds, which might be fine funds for somebody, but they're entirely inappropriate for you. Or maybe you're the lowest cost fund that any provider has to offer and they're great funds, but they're totally wrong for what you need. It's the wrong asset allocation, it's the wrong strategy. So as you look at this, you have to look at things strategically. And putting a plan in place can help you address all these questions so that you can do the right thing financially to ultimately support what you want your retirement lifestyle to look like. So when it comes to retirement mistakes, I've seen hundreds of them. But some mistakes are more avoidable than others. And the mistakes we cover today are very avoidable if you know what they are and know how to plan around them. So I hope that's helpful as you're planning for your own retirement, or maybe you're already in retirement. Being mindful of what to look out for is a wonderful place to start. So as we wrap up today, just a reminder that you can listen to this podcast on Spotify and Apple Podcasts. If you're doing so there, we'd really appreciate you leaving a review. If you're not already subscribed to the YouTube channel, be sure to subscribe there at James Knoll. Lots of other videos there, as well as a new Root Financial dedicated channel. So if you've not already done that, go to Root Financial, subscribe there. So there's three different places you can look. You can listen to the podcast directly on Spotify or Apple Podcasts. You can listen directly on my YouTube channel, which is James Knoll. And then there's another YouTube channel that I'm doing with Ari Taliblib that's on the Root Financial channel. I know many of you listen to his podcasts and videos as well. So many different places to find us. With that being said, thank you for listening and I'll see you all next time. Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission, and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Hey everyone, it's me again. For the disclaimer, please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartners.com and click Start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss on this podcast is intended to serve as advice. 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