3 Retirement Obstacles
Getting older just kind of happens. The next thing you know you’ve hit 50 and can’t believe you are that old. I won’t be there for another year, but already feel that way, especially when my son reminds me that I have been out of high school for over THIRTY YEARS!
Many of my clients are near fifty, give or take a few years, and many now have their focus squarely on getting their children through the college years. Unfortunately, most people choose to deal with one financial issue at a time. This reactive approach to financial planning is a major cause of anxiety.
Here are three reasons so many affluent people will be in for a rude awakening ten years from now when they decide it is time to get really serious about retirement.
1. College -You decided to pay for your kid’s college costs, but didn’t bother to start saving when they were young. This means you will be forced to take the lion’s share of your discretionary income during your prime saving years and send it off to whatever college your children attend. As most of you know, this could be $20-50,000 per year, per kid, and could go on for the better part of a decade depending on the age spread of your children. The big problem with this is the opportunity cost from the lost decade of retirement savings while your kids are in college. If you have three children, the four-year college bills could easily be in the $500,000 range depending on their age and where they go to school. That is $500,000 less going into retirement savings and the future value could have grown to one million dollars! By the time your kids are done with school, you are that much older and have much less time to play catch up. It could be a painful reality for you.
2. Retirement Housing – For many, the monthly cash flow needed to maintain your lifestyle is far too high to be met by interest from your savings. Did you recently refinance your mortgage for another thirty years? If so, it will not be easy to keep paying for your home without earned income (can’t afford to retire). The other large expense that is killing seniors in this area are property taxes. Most readers of this blog are paying $8-$20,000 per year in property tax. Unfortunately, this keeps going up. The basic cost of living for people who want to continue to live in the expensive home were they raised their families may find this difficult to maintain if they were to retire. With today’s interest rates, it could take a nest egg of one million dollars in order to earn enough interest just to pay the mortgage debt service and property tax bills.
3. Your Have Purposely Kept Your Head’s in the Sand – You haven’t been saving enough over the years and have kept your head in the sand rather than hiring a Certified Financial Planner to give you a true analysis of how bad your retirement plan situation might be. Does this sound familiar? We just experienced a lost decade when U.S. stock prices did very little and our home equity was drastically cut. You are ten years older and have seen some growth in your net worth, but really do not know or maybe do not want to know how dire your financial plan may be. Hopefully, stock market returns will go up for the next 10-20 years, but how much would your 401k have to grow to be sufficient to replace your earned income? Keep in mind that over the past 30 years, the bond portion of your investments has gone almost straight up in value to all-time record high prices leaving a sideways 2-3% annual return over the next five years as a best case scenario. If you invest in bonds you need to factor this in as a 60/40 stock/bonds balanced portfolio might be expected to earn 5-6% going forward.
What You Can Do About This Now?
- Start living a simpler lifestyle and saving a much higher rate of your income and take advantage of all the tax advantaged vehicles you can.
- Plan to pay off your mortgage by the time you retire or downsize your home and live in a low tax state (FL, TX, etc.).
- Get in to see a fee-based Certified Financial Planner (CFP) to see what your retirement future really looks like.
The bottom line is that I am encouraging you to be proactive when it comes to your financial life plan. The climb definitely gets steeper the longer you put it off. GOOD LUCK.
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