Common Retirement Planning Mistakes
Richard Thaler was awarded the Nobel Prize in economics last week. Thaler is the first person who works in the new field of behavioral economics to win this coveted prize. Traditional economics assumes that people behave rationally when it comes to money matters and, of course, people don’t. So in honor of Thaler’s recognition, my colleagues at JPFP have identified the most common behavioral mistakes we see people making as they prepare for retirement. Let’s start with the list from Amy Shappell, CFP® and see if you are making any of these blunders.
- Not realizing how FAST retirement will come. The days are long, but the years are short. I can’t tell you how many people I talk to who are late 50s, early 60s, and in dire financial straits, and they never thought about saving for retirement until they hit 50. Or they saved a tiny bit but not near enough. Or decided to risk a lot of money on a business that failed.
- Assuming everything is going to go as planned. You’ll (happily) work to 67, you’ll save extra when your spouse goes back to work, you’ll be okay with buckling down and spending less in retirement. But sometimes, stuff goes wrong. You have to pay for rehab for your kid(s). Or a third kid keeps you from going back to work as soon as you wanted (plus that extra four years of college to pay for). Or you can’t sell your vacation home for as much as you’d expected. Or you decide you really want to leave it to the kids. Or you don’t get that promotion. Plan for bumps in the road. We went to a D-day museum when we were in Normandy last week, and I noted an apt quote by Eisenhower: Plans are worthless, but planning is everything.
- Thinking that the goal (of retirement) is too big to even contemplate so you use that as an excuse to do nothing. So break it down into smaller chunks. Annual, monthly, maybe even weekly.
- Retail therapy. I read a REALLY long article in the NY Times about a woman who lost her job at a bearing factory. The closer the layoff came, the more she spent. She was never a ‘good saver’. Do it, even if you’re not ‘good’ at it.
- Not realizing that you might want retirement to come even faster once you are 55 or so. A fair number of people love their work, but there’s also a large segment who’d retire sooner if they could.
- Treating a 401(k) like a piggy bank. I talked to a woman that HAD to have money out of her 401(k) to go visit her mother. To be clear, Mom was not on death’s door. It was just a pleasure visit. I warned her about this, but she explained that she didn’t do this all the time – this was only the second time she’d withdrawn money from her 401(k) for an “emergency”.
- Same with a house – it’s not a piggy bank. Cash-out refinancing is like crack for some people. So common these days to see people take out a 30-year mortgage at age 60. And they owe WAY more than they initially paid for the house, due to ‘remodeling’ or paying off debt or PLUS loans. I don’t know what the hell kind of remodeling they’re doing, but they need to stop.
- Not cutting the apron strings. I know, I KNOW we all want to take care of our kids, but you need to be clear with them what you can afford to do for college without putting yourself in too much debt. There are some good in-state schools out there and community colleges too. Take advantage of them.
- Depending upon an inheritance. Hope is not a plan.
- Assuming that it will be someone else who needs long-term care. You don’t stop paying on your homeowner’s insurance once the mortgage is paid off, even though the absolute risk of losing your home is very, very low.
- Finding another use for every ‘extra’ dollar that they get. I couldn’t wait until my kids were out of diapers. The money I’d save! I don’t think I saved a dime of it. It got frittered away to something else: Kindermusik or baseball or something. Same thing when I stopped paying for preschool. All the money! Yay! Yeah. Didn’t manage to save that money either. And this continues through when kids finish college, and the parents have a few years where they could save a ton, but instead decide it’s time to enjoy life.
- And on the other side of the coin: People who work so hard today and forget that they need to take time and enjoy life (and their families) NOW. No one is promised a tomorrow, although we are likely to have many of them, so you need to find the right balance. But that’s not most people as far as I can tell.
- Worrying about the Joneses. Numbers 6, 7 and 8 are really different versions of keeping up with the Joneses. Don’t compare your situation to anyone else’s. The circumstances are different.
Next time: Another list of behavioral blunders from one of our other JPFP Advisors. Are we having fun yet?