5 common mistakes people make planning retirement
After more than 20 years helping people navigate their finances in retirement we’ve been seen the
good, the bad and the ugly. We believe in learning from mistakes so here are the top 5 that stand
out:
1. People underestimate how long they’ll live
People often say, “this will be the last car I buy”, “these golf clubs will see me out” or (my favourite),
“this will be our last big trip”.
This can be from people as young as 60, with statistical life expectancies of 25 years and a rea-
sonable chance of making 90.
Medical innovation has seen an increase in how long people live. The biggest challenge we all
face is looking after ourselves in a way that will see us enjoy our bonus years.
From a financial perspective its important to run long term projections that take account of several
investment cycles (both good and bad markets) and factor in both planned and unplanned ex-
penses.
A great financial plan is one that anticipates the good times as well as the challenging times to en-
sure we remain on a stable footing.
2. Emotional decision making
I’ve often felt the most valuable benefit people get from working with financial advisers is having a
partner that won’t get emotional about decisions.
Typical emotional decisions include car purchases (e.g. I planned to buy a Mazda and came home
with a Mercedes), house purchases (planned a budget of x but spent y), furniture, renovations,
providing financial assistance to children and holidays.
Importantly, a great financial plan contemplates such purchases and aims to match dreams with
reality. The hardest thing is when emotion takes over and the decision robs us of other important
items (e.g. We couldn’t go on holidays because we spent too much money on the kids).
Having a trusted partner who isn’t emotionally attached to the outcome is a key way to ensure suc-
cess in this area.
3. Chopping & changing investment strategy
Successful investing is not overly common.
Most research will tell you that many mum & dad investors underperform basic markets.
Why is that? Its because of our emotions or our tendency to get greedy & fearful. One minute
we’re investors, the next minute we’re speculators. We get in & out of investments at the the wrong time.
Don’t feel bad though, the media are extremely efficient at selling news and trade in fear which is largely responsible.
If you think it won’t be you, think again, the majority of people are falling victim to this behaviour.
Again, a trusted partner who will collaborate with you on such decisions is generally a good place to start when rectifying this.
4. Failure to match income & expense profiles
Have a look at your expenses. Some of them are reliable and come in every month or quarter (e.g.
utilities or food). Others are forecastable but more sporadic (e.g. clothing, white goods or a new car). Some are unique but forecastable (e.g. a renovation), and others just came out of the blue(e.g. new technology we didn’t know we needed!).
When we transition from our working life to retirement (sometimes over a number of years) we of-
ten move from 1 or 2 sources of income to many. Its important to match the profile of the income
(reliability, frequency and annual growth) so that, as much as possible, the income matches your
expense profile.
There are often a lot of variables at play within a retirement plan (investment markets, pensions,
taxes, government benefits). Life is very easy when these profiles match but it can be quite unsta-ble if you’re always having to sell something to pay a specific bill. Worse still, you could respond by having too much money in cash which might see you run out of money too early resulting in a downgrade to your lifestyle.
5. Forget to factor in fun
The final common mistake I’ve seen is people planning a “military regime” lifestyle in their retire-
ment. Their budget underestimates all sorts of expenses such as their holidays, home upgrades,
new cars & technology so that the numbers look good on paper, rather than matching historical
patterns or the dreams that have been bubbling away in their heads.
One thing I noticed a number of years ago is that people can struggle to picture the future. A handy
tool I often use is to simply draw a timeline on a whiteboard, with the names & ages of relevant
family members. Somehow seeing an age next to a name helps trigger additional detail that is es-
sential for getting these plans right.
Its been said that financial advisers often help people annunciate their goals. Sometimes this can sound a little condescending (a pet hate of mine) but there is some truth.
Additional thoughts
So that is my top 5 retirement mistakes. I must admit there is one issue that probably should have
made it on to the list and that is laziness or inertia.
Its common for life to get busy and sometimes overwhelming. When we’re like that its all too easy
for us to forget to ask for a helping hand.
Transition Wealth is named in recognition that we help people transition between life stages. As
with any transition there are things that we must give away in order to move forward and capture
the future we desire. The power of a helping hand should not be underestimated!
Transition Wealth and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd
ABN 54 139 889 535 AFSL 357306.
The information in this article should be considered general advice and may not be applicable to
your situation. For advice tailored to your specific circumstances please contact Transition Wealth on (02) 8019 7144 or service@transitionwealth.com.au.
Scott Hammond CFP
Director & Financial Adviser