In a recent Bankrate.com survey, older Americans regret:
- Not saving enough for retirement
- Not keeping enough set aside for emergency expenses.
Mistakes in retirement can be costly and unfortunately very common. Money magazine’s recent article captures 15 examples.
While I have seen every one of these 15 mistakes actually happen, the most common issue I’ve seen this year is Number 7 on the list: Not knowing how much to withdraw.
This has become more pronounced as a result of the flat market. Investors who saw an 8-10% rate of return on their account could take out about 8-10% each year and end up with an account balance close to what it was at the start of the year. But with the markets flat to down slightly, investors who continue to take out 8-10% each year are seeing their account down by that amount.
The general rule of thumb is to take 4% per year. Take out more on a regular basis and you run the risk of depleting the account.
Start saving early. The chart below shows why it’s better to start saving earlier rather than waiting. True, it may be most hard to save in your early 20s when you have student loans and an entry level salary. But look at the difference between those who save early on those who wait (even 10 years)! This is the magic of compounding interest.
Recently, I had a few conversations with clients about their retirement portfolios. In these cases, there was some disappointment with the returns that the markets have provided, or not provided, in the last couple of years. For them, and I suspect other clients as well, there’s an added complication: taking big distributions every month, or every year, can reduce the IRA balance significantly and quickly. They fear they’re running out of money.
These discussions have led to my taking a refresher course on the concept of a reverse mortgage, loans that let you borrow against the value of your home, but don’t require repayment while you’re still living in it. This type of loan has been around for a while, but it may become more popular for several reasons. Here is what I learned.
Five Things You Should Know About Reverse Mortgages:
Your retirement portfolio should not be the only resource you use for your income. I’ve always been a proponent of the 3-legged stool for income stability. For many people, the HECM can become one of those legs.
I recently read Carl Richard’s “The One-Page Financial Plan” and was impressed with Richard’s approach to working through some complex financial issues. In particular, he focused almost exclusively on the emotional issues that investors face. What does money mean to the investor? What are the investor’s goals? It’s these issues that overwhelm many investors to the point where they give up or procrastinate for years.
For folks that need a plan and don’t know where to start, this is a useful resource. It’s simple and easy to follow and the principles are very similar to what I employ with my clients. This is a great guide to help investors think about money in terms of goals and how to get on the same page with a spouse on what the future looks like. It is the most difficult part of financial planning.
It lacks specificity and implementation ideas. Since every investor has a unique situation. This makes the title of the book a little misleading since you don’t end up with a true financial plan on one page. The book doesn’t go into detail about growth rate assumptions or serial payments or how to calculate time value of money. Rather it focuses on concepts at a high level.
If the goal is to starting thinking and talking about the future, this is a great place to start.