I recently read an article titled 27 Ugly Truths About Retirement.
Twenty-seven is a lot to wade through, so I pared the list down to nine.
Let me warn you upfront: Many people would prefer to avoid confronting some of these ugly realities. I believe we ignore them at our peril. So, let’s jump in.
1. Investing too conservatively
When approaching retirement, many people move from more aggressive investments to more conservative ones. That’s understandable, but it’s possible to swing the pendulum too far and become so conservative you fail to keep up with inflation
Take the G fund, the most conservative option in the TSP as an example. If 100% of your money is in the G fund for a long time, are you earning enough money? In September of 2023, I looked at the TSP webpage. The 10-year average growth was only 2.25%.
I then did a little research on inflation rates. Most of the time, inflation hovers around 2%. But in 2022, it went up to 9%. It’s currently (late February 2024) 3.09%. When the inflation rate is higher than your investment return, your spending ability is diminishing. The balance in your TSP might be slowly going up, but your ability to purchase the same amount of goods and services is actually going down. I’ve heard someone describe this as “going broke safely.”
2. Living longer
We are living longer than our parents, and living longer costs more. You’ll need more money to fund those extended years of retirement.
3. Not Knowing When to Take Social Security
Another ugly truth about retirement is figuring out the most beneficial time to start taking Social Security. You want to time it so that you get maximum value from your benefits. But with so many factors to consider, this can be tricky. Mistime it and it can mess up your plans.
It might be wise, especially if you’re married, to discuss this with a financial planner.
4. Regretting the Fact that You Skipped Making Roth Contributions
I talk with many soon-to-be retirees who regret not contributing to a Roth account–or not doing Roth conversions sooner.
The benefit of a Roth account is that you fund it with after-tax dollars. This means all the growth in that account is tax-free to spend. It’s also tax-free for your beneficiaries when they inherit it. The only requirements? You have to be 59 and a half and the account must be at least five years old.
For a long time, the mantra has been, “It’s fine to put money into your traditional account while you’re working because when you retire, you’ll be in a lower tax bracket.” That is sometimes true. But what we found working with many federal retirees is that once they start collecting a pension, Social Security, their spouse’s Social Security benefits, plus some distributions from their TSP or IRA accounts, they don’t end up being in a lower tax bracket.
At the filming of this video, there’s a 10% bracket, a 12% bracket, a 22% bracket, a 24% bracket, and so on. Before the Trump tax cuts, the 12% bracket was 15%, and the 22% was actually 25. However, if the Trump tax cuts sunset–as they’re scheduled to do on December 31, 2025–tax rates will revert to what they were previously. In short, when you retire, you’ll have to pay taxes at whatever the going tax rate is. And chances are good that it will be higher.
For this reason, many in their late 50s or 60s regret not doing Roth (or Roth conversions) sooner. If that’s you, and you’re thinking It’s too late for me, check out this video.
Again, the benefit of Roth is that all contributions grow tax-free. Even if you’re 65, you may live another 15-30 years. That’s a lot of years for potential growth! And if you plan to leave that Roth money to a beneficiary who’s not your spouse, they’ll have an additional 10 years for that money to grow before they have to start taking distributions. This is why I believe it’s never too late to start Roth.
5. Needing Some Kind of Long-term Care
Federal healthcare and Medicare do not pay for long-term care. This needs to be something that you either pay for out of your income/assets or by having a long-term care policy. You can get some permanent life insurance, where the death benefit doubles as long-term care coverage.
Many people are uncomfortable contemplating this. Even so, it’s something you need to have a plan for.
6. Having Inflation Eat Away Your Nest Egg
Social Security and pension plans have cost of living adjustments built into them. But those “raises” may not fully keep up with the true cost of living. You have to stay ahead of inflation. Your assets need to be growing so that in 10 or 20 years when it costs more to live, you’ll have adequate assets to pull from. This requires getting the right investment mix–one that suits your risk tolerance but also funds your lifestyle.
We made a video that discusses some of the conservative options because they’re not all the same. You can find that video here.
7. Hurting Yourself to Help Your Kids
As parents, we want to be generous with our kids. We want to see them get ahead and flourish. However, it’s possible to help your children so much now that you end up jeopardizing your retirement later.
The fact is, your children can always borrow money to pay for college, but you can’t borrow money for retirement. That’s why, with our clients, we prepare a financial blueprint. This shows, with surprising accuracy, whether retirees will have enough money for retirement, based on their level of spending.
When the blueprint shows a surplus of money, we tell parents, “If you want to help your kids with that house down payment, you have the means to do so.” When the outlook is less rosy, we’re able to say, “You may want to take a long, hard, second look before you spend $300,000 on that undergraduate degree.”
Obviously, you can help out your kids any way you wish. Our encouragement is, “In deciding to help, just don’t jeopardize your own future.”
8. Caring for Aging Parents
As you’re determining your spending needs in retirement, consider if you’re going to need to help your aging parents financially. If so, it needs to be in your budget.
9. Planning for Wealth Transfers
The ninth ugly retirement truth that many people don’t want to talk about is wealth transfers. Some families panic at the thought of discussing money. They’re uncomfortable disclosing debts or desires for fear of hurting feelings or creating conflict.
However, to avoid misinterpretations and relational friction, it is wise to sit down with your future heirs and have a conversation. You may need to have an objective third party present (your attorney, financial planner, a trusted friend of the family) to ensure that the conversation is productive and that all present understand the rationale behind the decisions you’ve made
This is something we help our clients with.
That reminds me…if you don’t have a financial planner, visit our website, christycapital.com. There–in the top right corner of the page–you’ll see a green TALK WITH AN ADVISOR button. Click it, and leave us a short message. We’ll be in touch right away.
And if you want to know four other things to consider before retirement, watch this video right here.
At Christy Capital Management, our sole goal is to help you prepare for the best retirement possible.
