Broker Check

What Causes a Good Retirement Plan to Fail

| July 18, 2017
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Financial planners tend to work with clients who either make or save a decent amount of income or have had some “sudden wealth” event in their lives (e.g. inheritance, sale of a business, severance payout, etc.) and they don’t want to lose it.  These clients usually want a long-term plan that can – at minimum –  give them the best chance of a comfortable retirement in addition to perhaps meeting other goals (such as college for the kids, leaving a legacy, etc.).  So once that good plan is crafted, implemented, monitored and adjusted along the way, what can cause it to fail? 

The first answer most readers would likely give is “investment performance.”  Yet, the most seasoned financial planners will likely argue that, in their entire careers, they have never seen bad portfolio returns be the cause for a failed retirement plan.  So if a poorly-performing portfolio is not the cause, what is?  The answers may or may not surprise you. 

Here are some examples of circumstances that can damage (sometimes beyond repair) even the best retirement plan, and most of them are out of the financial planner’s control: 

  1. Adult Children Still “On the Payroll”–  This does not mean when a client helps to pay for the grandkids’ college or makes a short-term loan to the adult child currently in-between jobs.  This is the adult child who considers the parent to be an endless source of money and has come to expect a monthly “allowance” equal to the majority of their living expenses.  This can be especially problematic when the adult child is still under the parents’ roof, causing the parents to spend more (perhaps) for a bigger house than is needed – and save less for their retirement.  It’s also very dangerous when a parent may be slipping cognitively and the kids swarm in to “help themselves” to Mom or Dad’s bank account.  I have covered this in a previous article, and the reality has not changed:  if the adult child bleeds “The First National Bank of Mom and Dad” dry, the retirement plan will fail.

  2. Divorce– Intuitively, this makes sense:  when a couple over the age of 50 divorces, the retirement assets get split and the living expenses increase.  It gets much harder to stretch a retirement dollar when this happens – especially if one or both spouses have stopped working and saving.   While I am not advocating couples stay together if they are truly miserable or in an abusive situation, it bears noting that the financial “grass” may not be “greener” on the other side of divorce.  Money spent on counseling to resolve differences, in this case, may be a good investment. 

  3. SpendingWithout Limits – If you’ve had a good income while working, and haven’t had to control what you spend in recent years, it can be hard to break that habit once you’re retired.  “Traditional” financial planning rules state you should plan to spend in retirement at least 80% of what you did while working, the reality is, new retirees rarely spend less.  In fact, the first few years of retirement can often be a “spending spree,” as retirees feel they finally have the chance to take that special vacation, buy their dream car, or do something else they’ve been longing for during those last working years.  If this situation likely applies to you, your financial plan should have this factored in, and if the long-term spending budget in your plan isn’t something you are prepared to adhere to, the chances your retirement plan will fail are much higher. 

  4. Vacation Home– Many successful clients often feel that buying a second home in a vacation location is a good investment and satisfies the “American dream.” (For Floridians: does a cabin in the mountains of North Carolina sound familiar?).  When both spouses are working and making peak incomes just prior to retirement, that may be true.  But when the retirement date arrives and incomes drop, second homes can become a huge drain on a household budget – especially if those vacation homes aren’t being rented out when not occupied or longer-term capital improvements (new roof, flooring, furnace, etc.) start becoming necessary.  More expensive homes may also be harder to sell when necessary.  How these “investments” will be handled in retirement needs to be reviewed very carefully before retirement actually occurs. 

  5. NewBusiness Venture – Let’s face it:  retirement may not be all it’s cracked up to be.  Many successful CEOs retire and then go crazy because they can only play so much golf or do so much boating or fishing during the week.  But heading back to the corporate world may not be so easy for a 60 or 70-year old.  Their solution? Start a business.  While this sounds attractive, if getting a new company going requires a substantial capital commitment – and it comes from the retirement portfolio – that could be a problem.  Many a retirement plan has gone south because the retiree’s new business diverted assets needed to support retirement income to a venture that did not necessarily get off the ground. 

  6. HealthCare Risks – While this is certainly not within the financial planner’s control, it may not be within the clients’ control either.  With improvements in medical treatment and increases in longevity, an unexpected illness in a client’s 70’s or 80’s may drag on longer than it did just a decade ago.  And with the costs of treatment escalating – and potentially less of it covered by Medicare – the financial burdens of a significant health issue can absolutely erode a good retirement plan over time.  Clients should look at their family history and try to evaluate what kinds of health problems they may be facing.  A good financial plan can help address some of this risk, but likely not all of it.

  7. SeniorAbuse – The amount of fraud being perpetrated on seniors these days is approaching epidemic proportions.  A 2012 survey by the CFP Board of Standards found that senior victims of financial fraud lost an average of $140,500.  It’s not just Nigerian e-mail scams.  It could be financial “educational” presentations that offer free meals and cash prizes to seniors in exchange for buying investment products may be unsuitable.  And it’s estimated that between one-fifth to one-third of senior fraud victims knew their abuser.  To protect and preserve a good retirement plan, it’s more important than ever for retirees – and their trusted advisors – to be careful.  For more information, see Taylor Wald’s blog on Senior Scams.

While even the best retirement plan can’t solve for all of the risks noted above, some of them can still be planned for – and mitigated.  It takes a frank discussion between a client and his or her financial planner and a willingness on both sides to take the necessary steps to keep that good plan on track. 

If you have concerns about any of these risks and want review them in relation to your own retirement plan, we invite you to give us a call.   

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