Three Ways to Ruin Your Retirement

Before retiring, a person needs to be able to answer questions necessary to ensure sufficient financial resources.

Looking forward to your retirement?

Many federal employees look forward to being able to retire. A recent MSPB report (see the link on the left hand side of this page) says that large numbers of current federal employees plan to retire in the next several years. But to enjoy the time you have earned, you have to plan and you have to ask yourself some hard questions.

How much money will you have on the day you retire? Will it be enough?

While it should go without saying, the reality is that many people are not realistic about their retirement money. Here are three common mistakes, recently identified in Money magazine, that you need to avoid making.

First, how much money will you need after you retire?

It is easy to cut corners on this and to fool yourself into thinking you will need much less than you will really need. Once you know how much you need, you can come up with a rough idea of how much you need to have invested before taking the retirement plunge.

Most of us like to think about laying on a beach or traveling to exotic locales or perhaps just visiting friends and relatives in a leisurely way. But we don’t like to think about the need for future income. Or, if we think about it, we underestimate our future expenses. This is a dangerous game. If you lose, you pay the penalty.

Most future retirees assume they can live on much less than they currently receive in income. In one recent survey, many people thought they could get by on 50% of their current income.

It may be possible for some to get by on less money. You may not have the same dry cleaning bills to clean those work suits or dresses. You may not have to pay parking fees near where you work. You may not be commuting to work anymore so you may be able to get by with one less car and you may use less gas than you did driving to work.

It is even possible that your expenses may go down substantially. For example, if you sell a larger house at a substantial profit and buy a much smaller house with no mortgage in a lower cost geographic area, your expenses are likely to be much less.

Here is a radical thought you need to consider though. Many readers will find they will need 100% of their current income. Most will find they need at least 75% of their current income.

The money you will save on reduced dry cleaning bills and commuting expenses are soon eaten up by other expenses. If you are relatively young, you will probably want to travel. Those expenses will add up fast. You may want to visit your children or grandchildren out of town now that you have the time. More money out the window. Or perhaps you find you have more time to go to play golf and eat out in restaurants instead of just using the agency’s cafeteria. Hobbies and dining out will quickly absorb much of your income.

And don’t forget your cost for health insurance and related expenses. You may not like getting a raise of 4.1% as an active federal employee. But remember, as a retiree, your “raises” will be much less. You will find your “raise” for the year is about 1% depending on the rate of inflation. At the same time, your health insurance premiums may go up 10% or more a year. This has happened to current retirees who have seen their real income dwindle each year as a result.

And, as an extra kicker, your health insurance premiums as a retiree have to be paid out of after tax money. Under current law, you will not be able to pay your insurance premium out of pre-tax dollars. While it is not a lot of money, it starts adding up fast when you know your income will not be going up in the future.

In short, most people underestimate their expenses in retirement. The result could be a less pleasant retirement than you planned.

Second, how long you will live?

Many people assume they will live until 77 or so. That may be a good rough average but that average may not be of much use in planning your retirement. For example, if you are now 65, how long can you expect to live? You may be surprised to learn that the average 65-year old person can expect to live to 85. But there is a 50% chance you will live longer than 85. Will your money last that long?

Be optimistic! You may live longer than you think you will. Plan on doing so or you could find yourself broke at 85 or so and having to rely on relatives or the government to take care of you. (Check out the actuarial tables on the left hand side of this page to see your life expectancy.)

Third, how much can you withdraw from your savings each year without running out of money?

The amount you can withdraw depends on a lot of factors such as which retirement system you are in; how much you have saved; and how well your investments perform. You will need to talk with a financial planner to find out how much you are likely to need.

But you may be surprised at the percentage you are likely to be able to withdraw without depleting your assets. Keep in mind that when you retire, you are unlikely to be saving more money. If you have money in stocks (think of the TSP c fund) and the market goes down 25% in one year, you may have a big problem. If you withdraw money during a bear market, you will suffer a significant loss of funds. Even if the market rebounds a year or two later, you will not be able to recover if you have withdrawn money from your stock investments.

Also, keep in mind that if you decide you can withdraw $20,000 or so from your investments, that amount is going to have to go up each year because of inflation.

As a general idea, withdrawing about 4% of your investment portfolio per year will leave you with enough to avoid depleting your portfolio over the next 30-35 years.

4% of your retirement portfolio may not be a lot of money. But be realistic in your calculations. Hoping more money will come your way as you get older may lead to a retirement lifestyle that is less desirable than you now envision.

Does this mean you have to work longer than you want to or than you planned? Perhaps.. But consider the alternatives before leaving your job. What kind of job will you get if you decide you have to go back to work a few years after you retire? That extra couple of years can be worth a great deal if you have planned wisely and realistically.

The purpose of this article is not to discourage you, but to help you and your financial advisor answer some tough questions that need to be answered. If you don’t have the time or inclination to answer them, remember that ignoring these three questions could ruin your retirement.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47