The 7 Biggest Mistakes People Make in Retirement (And How to Avoid them!)

Transcript:

On this episode of the Personal Finance Podcast, the seven Biggest Mistakes People Make in Retirement.

What's up everybody, and welcome to the Personal Finance Podcast. I'm your host Andrew, founder of Master money.co. And today on the Personal Finance podcast, we're gonna be diving into these seven biggest mistakes. People make in retirement. If you have any questions, make sure you join the Master Money Newsletter by going to master money.co/newsletter.

And don't forget to follow us on Spotify, apple Podcast, YouTube, or whatever podcast player you love listening to this podcast on. And if you want to help out the show, consider leaving a five star rating and review on Apple Podcast, Spotify, or your favorite podcast. Player. Now, today we're gonna be diving into the seven biggest mistakes that people make in retirement.

And now the way that we're gonna structure this episode is I'm gonna go through the data on these seven different mistakes and what happens to a lot of retirees and why they are making this massive mistake. Then we're gonna talk through why this actually happens. So when we look at the data, we're gonna figure out why is this happening, and then I will show you how to solve this problem to ensure this does not happen to you.

Now, longtime listeners have heard me say this over and over and over again. You can learn from mistakes and they don't have to be your mistakes. And so we're going to learn from other people's mistakes by utilizing data to see what the biggest mistakes in retirement currently are. And so as we do this, this is gonna help us to make sure that we shield ourselves from making these mistakes.

And so one other quick announcement is we launched the beta version of Master Money Academy, and I am so incredibly excited to have that available to all of the rest of you at some point here in the near few. Sure, because our beta group and our founding wealth builders, they are absolutely amazing. And so what we are looking to do is create the best finance community of people in there who are encouraging each other, who are keeping each other accountable, and who are learning from each other.

And so we have launched with a small beta group of 75 people who are in Master Money Academy currently and going through the process and cannot thank you all out. All the founding wealth builders out there cannot thank you all enough for being a founding Wealth builder, and I'm so excited to kind of work through that.

Now for everybody else, we're gonna be launching Master Money Academy to everybody else over the course of probably the next month or so. So you may see that pop up over the course of the next month. The target date will uh, be announced pretty soon. But just wanted to state that up front here we are having some great conversations in there.

Just got done with our first coaching session yesterday, a group coaching session with a bunch of our members, and it is really, really powerful. Some of the goals that they have and the. Willpower, they have to build wealth because it's gonna be really cool to see some of these people achieve financial independence and it is a very, very inspiring.

So Master Money Academy is coming. The beta group is already fantastic, and it's just really, really cool to see all of this come together. So shout out to the founding Wealth Builders. Really excited to have you. Now let's dive into the episode. Alright, so number one is overspending early in retirement.

So the famous 4% rule, which was done by the Trinity Study back in 1998, found that a 4% withdrawal rate gives retirees a 95% plus chance of making sure they never run outta money over the course of 30 years, but withdrawals. Of five to 6% actually doubled or tripled failure rates depending on market conditions.

Now, this can be a huge problem right there, but making sure that you stick to the current 4% rule is very, very important based on that specific study. So in other words, overspending early increases the likelihood that your retirement plan could fail, and it increases that likelihood, double or triple when it comes to those failure rates.

So I want you to make sure that you are not overspending. Early Now, there was a second study done by Vanguard that sequence of return risk can devastate portfolio. So Vanguard research shows that if the first five years of retirement coincide with the bear market and the retiree overspends portfolio, failure rates skyrocket.

And so making sure that you have a plan in place of what you are going to be withdrawing in retirement early on in sticking to that plan is very important. Now, here's the tough part for retirees. A lot of times when you retire, you're brand new to this, you have never pulled money from your portfolio.

And honestly, that's probably a difficult thing to do when it comes to the psychology of money, is just starting to pull money and draw down from your portfolio, and you also have to kind of develop the skill of managing your draw down. You could be withdrawing too much and not even know it. So it's really, really important to make sure that you have that plan in place.

So an example of this would be a retiree withdrawing 7% annually, starting in 1973, which is when the oil crisis plus a bear market was happening all at the same time. They would've run outta money unless. Than 15 years while the same retiree withdrawing 4% survives well over 30 years. So the amount that you withdraw can have a massive impact, especially within the first five years of your retirement.

And so making sure you are disciplined during that timeframe is really important. Now, one thing to note is this next study, because according to the Bureau of Labor Statistics, household spending for those between age 65 to 74 is $57,818 per year, which is actually higher than households age 54. To 64.

So this means retirees don't slow down spending when they first retire, and they often spend more because they're spending more time on their travel, on their hobbies, on their bucket list, which increases risk. Now, this is not to say that you should not spend more within your first five years, but it does increase that risk.

And so there's a number of things that we can do to make sure that we protect ourselves when this situation arises. Now, healthcare costs also rise later, so early overspending is dangerous. We're gonna talk more about healthcare costs here soon, but they do rise early, and the average 65-year-old couple will need about $315,000 after tax for healthcare costs.

Many retirees underestimate longevity. So some retirees are putting their plan together, but longevity is something that is a real, real risk for some retirees because a man has a one in three chance of living to 90 after the age of 65, and a woman has a one in two chance of living to the age of 90. So you need to plan.

Typically, I would say you need to plan all the way up to a hundred years old, making sure that your plan is set in place before that. So why does this mistake happen number one. Is lifestyle inflation in retirement. You have a lot more time in place. And what happens when we have more time? Have you ever had extra time off and all of a sudden you have this free time?

Well, what do you start doing? Well, what's going on over on amazon.com over there? Let's go start scrolling through there and seeing if there's something I can do and or you are going to spend more time dining out. 'cause you don't wanna be sitting in the house all day or maybe you wanna go and start traveling because this is what you dreamed about for your retirement.

I want every single one of you doing this. I want you spending your time dining out. I want you spending your time traveling the world, but we gotta plan for it and make sure we have the proper plan in place. There's also psychological shifts because a lot of people have been working for a very long time.

It feels very natural to reward yourself and you should reward yourself, but you have to have the amount of money there so that you do not run out of money. And so making sure you have enough there is gonna be important. Now, underestimating retirement length is I think what a lot of people do because many plan for 20 years, but end up needing.

30 plus years. Now, this is a very difficult situation to be in 'cause we have no idea how long we're gonna be living. We have no idea how long we'll be on this earth. And so a lot of people are planning for 20 years 'cause they think they'll live to 85 or 90, somewhere in that range. And instead some of them will live to 95.

My grandmother just passed away and she was 101. And she had no idea that was going to happen. So this is something I think a lot of people need to make sure that they're planning for longer periods of time, especially as medicine is advancing, we are getting healthier as a society. And so because of all of these different things, you may be living longer.

And so planning to live longer is really, really important. And then there's market optimism. So. Early bull markets. If you retire and there's a huge bull market going on that could lead to early optimism, making you think, okay, well I can just start drawing down more over time. I think you still have to stay disciplined within those first five years and kind of feel out what's going on in retirement.

Just going. Headstrong and spending more is not always the best option. Now, let me talk through this a little bit too, because most retirees when they retire, studies show that within the first 10 years is where they spend most of their money because they are more active, there's more things that they can do, and they want to go spend time checking things off that bucket list because time is a finite resource for them during that timeframe.

And so because of this, a lot of people are spending more money within the first 10 years. But if you think you're going to do that. All you have to do is shift gears and plan to spend more money in the first 10 years, and you can look and see what this looks like. So how do you avoid overspending early?

What are some of the things that we can do to work against this? Number one is we can adjust spending based on market performance. So there are things like dynamic withdrawal strategies, which allow us to withdraw a certain amount based on what the market. Is doing, and these can help you extend your portfolio life.

So if we are in a bear market, the market pulls back 20%, maybe that year, you're only drawing down 3% of your portfolio and you build up some cash reserves to fill in the rest. Whereas if the market is surging and the market has just an incredible year of 30%, maybe you're bump it up to four point half 5% during those years.

And those years only, you don't get used to that lifestyle inflation. You just want to be able to live your life during those years. Maybe you take the extra couple vacations, maybe you take the European cruise. Those are gonna be things that you need to be dynamic and flexible when in retirement. Now.

Cash reserves are gonna be very, very important. This is why I think most retirees need to have a couple years of cash reserves. You can put them in bonds, you can put them in a high yield savings account, something that's going to return you enough, but you just wanna have them in a place that when these market pullbacks happen, you can draw some of your income from the cash reserves so you don't draw on your portfolio when it is down.

I really, really like that strategy, and some people may ask me, well, Andrew, how much do I need to have in cash reserves? It's gonna be dependent on your swan number or your sleep well at night number. So for me, specifically, my goal and my plan when I become fully retired, which I don't know if that'll ever happen, but when I do become fully retired, will be something like three to five years.

That's the range that. I wanna be in when I hit retirement age because I just want to have that extra security. Now, is this stupid to have that much in cash? Probably. It's probably not the most optimal thing in the world, but I like it. I like to have extra cash on hand. I'll put them into bonds, I will put them into TBIs, whatever is performing well during that timeframe so that I can get the optimal return.

And then from there, I have extra cash on hand. Now, as you start to approach retirement age, I want you to divide retirement into buckets. So essentials would be like housing, food, healthcare, those types of things. Then we went once, which is travel, hobbies, luxuries. You need to make sure that in your retirement budget, you have a once category where you can spend a pretty penny on Once.

Unless you just want to sit in the house all day long, which I'm, I'm assuming most of you don't, you need to make sure that you have a once category. If you love golfing or fishing, or if you love travel, or if you love going to fitness classes, or if your big hobby is classic cars or whatever it is, it doesn't matter what it is.

You need to make sure that you have cash on hand for those hobbies because you're gonna wanna pursue those interests, and that's what's gonna lead to a fulfilling life if you're not working. Also, legacy, thinking about that. Legacy charitable giving, family support, those types of things, and then stress testing your portfolio.

So one thing that people do not do enough is they don't stress test their retirement portfolios. So there are things like Monte Carlo simulations that you can do or retirement planning tools out there. One, for example, is called Bolden that I have been testing as of recent, and I will kind of report back on some of that as we go through this.

But you can actually see how your spinning holds up in different market conditions. So if your success rate is anywhere below a. 50% success rate, or if it's even close to a 50% success rate, it is way too aggressive. You need to aim for 85 to 95% success rates when you run retirement simulations on your portfolio.

And the reason for that is it's really, really important to be conservative in retirement. Honestly, I think you should get as close to zero as you possibly can and figure out what that number is. So it is something that is really important for most people because overspending is that silent killer that can take you out and then only allow yourself to increase spending if your portfolio exceeds a set threshold.

So setting up guardrails within your portfolio when it comes to retirement is very important. And so when your portfolio declines, I would cut back slightly, maybe cut it back 10%, or reduce your spending just a little bit. This is what retirement's all about is being dynamic. Being flexible, especially based on what the market conditions are doing.

Now, there are studies out there stating that you could spend more than 4%, and so I still think that 4% is very conservative when you look at some of those studies. But can you spend more? We'll have episodes coming up on that because I would like to dive deeper into the data for you so that you can see what happens when you spend more.

Alright, now let's jump into number two. Number two is ignoring healthcare costs in retirement. So this is a big one. This is one that you really need to perk your ears up and listen up because this could be a massive issue for a lot of people in retirement if they don't focus their time and energy on this.

Okay, so healthcare is the number one expense for retirees after housing. So it's housing and healthcare is number two. And so according to the Bureau of Labor Statistics, households age 65 plus spend an average of $7,030 per year on healthcare. About a 14% of their annual expenses. 14% of your annual expenses is nothing to sneeze at whatsoever.

And when we plan for retirement, we need to make sure we have a healthcare bucket available. We need to have something that we can draw on for our healthcare expenses. Now, this percentage rises steadily with age, often overtaking housing in the later years. So as you start to age, you will likely spend more on healthcare than anything else.

This my friends, first of all. Is why it is really important to take care of your health now, even when you are younger, because this cost could be significant if you do not take care of your health early on. Now, Fidelity's 2024 estimate a 65-year-old couple retiring today will need $315,000 after tax to cover healthcare expenses through retirement.

This doesn't include. Long-term care, which can add $100,000 depending on duration and setting. Meaning if you go into a nursing home and you need long-term care, this is gonna cost you well over a hundred thousand dollars. In fact, when my grandmother, who I just mentioned, was over the age of a hundred, uh, when she was in long-term care, she was there.

A lot longer than everybody expected. I think she went in there when she was 93 or 94 and she lived to 101. They expected her to be alive in the next couple of years. She had a bunch of heart conditions conquered. Those heart conditions got stronger actually and continued living on, which was fantastic.

But at the same time, she lived there a lot longer than she thought she did. So she spent hundreds of thousands of dollars on her being in a long-term care facility. So you've gotta make sure that you understand this is something we are planning for long-term. Even early on, this is not to scare you.

This is to show you what reality is. Now, Medicare doesn't cover everything as a third thing that you need to note because Medicare covers hospital and doctor visits, but not dental or vision, hearing aids or long-term care. And so the average retiree spends $6,500 out of pocket every year, even with Medicare.

Also, healthcare inflation is outpacing general inflation. So I've talked about this a number of different times, but over the past 20 years, healthcare costs. Have risen an average of 5.4% to 7% compared to the general inflation, which has been about 2.8%. Now, this is for a number of reasons. One, insurance companies keep jacking up rates.

Two, the healthcare providers are increasing the costs of what they're charging insurance companies. So there's this catch 22 in this cycle that is happening where healthcare costs honestly are getting a little bit out of hand. And so because of this, our healthcare issues are a whole nother debate, a whole nother conversation.

But we're gonna have to deal with it right now. And so right now we need to focus on the things that we can control. I know it's frustrating, I know it's annoying, but this is what you have to deal with if you live here. And so because of this, we need to make sure that we are, uh, planning for this long-term.

Now, the long-term care is the major wild card again. Explained, my grandmother lived a long time and she lived a lot longer in long-term care than they thought, and so this is the wild card for a lot of people. Having extra cash on hand to make sure that you can cover that if you do live longer, if you're gonna be in a facility, is something to consider.

Now there are hybrid options as well. So like for example, my wife's grandmother who is still alive, they found a situation where they found a caregiver and then had her in her house. But she has a caregiver full-time, 24 hours a day that lives with her, uh, in that house and actually found it to be cheaper than putting her in.

You know, a long-term care facility and she has a better quality of life because of that. So there are things like that, that are hybrid options as well to consider, um, as time goes on. But the median annual cost of private nursing home in 2024 is $116,000 according to Genworth. Now that's the median.

Even part-time home healthcare averages around $75,000 per year. Now, based on my research, it is not that high in my area. But it can get up to that level depending on the packages that you put together. And so it is close to that number. And in the future it's gonna be a lot higher than that. And so making sure that we are planning for this is very, very important.

Why does this mistake happen where people kind of don't plan for healthcare? They don't have enough money for healthcare? Well, number one is they have overconfidence in Medicare. I think a lot of people. Believe Medicare is just gonna bail them out of everything. But having that overconfidence in Medicare, as you can see, $7,000 per year of out-of-pocket costs on average can really add up over the course of retirement.

You know, over the course of every decade, that's over $70,000 that you're gonna be spending on healthcare. And so if you live three decades, you're spending well over $200,000 just on out-of-pocket costs, and that's on the average. Some of you may spend more than that, and so we gotta make sure that we understand, uh, why this is happening.

Also denial about aging, so people underestimate how fast health can decline. So there's this book by Peter Attia that I, uh, just read called Outlive, and it is one of the my favorite books of the year. It is all about longevity. And making sure that you have healthy years in your last decade or two. And so this is something I think a lot of people deny, how fast you can quickly decline.

And so you gotta make sure that you are doing things in order to not decline. Now, failure to plan for inflation is the third one, and I think people fail to plan for inflation. These inflation rates are astronomical right now for healthcare, but they don't realize it's happening. I want every single one of you to understand that this is happening and we can put a plan in place to kind of focus on this.

And then they have a short term focus. So a lot of retirees are just focusing on, you know, the next day or the next week, or the next month, or this year alone, and not looking about 10 years ahead. And so we gotta make sure that we are looking both at long term and the short term because they want to enjoy life.

Now and in the future. So the last thing we want as retirees is we want worry. We do not wanna worry at all. So what are some things that you can do to avoid ignoring these healthcare costs? Number one is build healthcare into your retirement number. Now you're not gonna know what the number is exactly, I get it.

But we can try to become as accurate as possible. So if you expect to spend $60,000 a year in retirement, consider adding, you know, 10 to $12,000 conservatively as the healthcare only category. Now, how can you do this? How can you compartmentalize it? My friends, the super retirement comes into play, which is our good friend, the HSA.

And so when the HSA comes into play, we're gonna start to figure out, well, can we use the HSA for healthcare expenses? So if eligible, if you are on a high deductible health plan, currently, you can contribute to an HSA, and if you contribute the annual max, you can get that triple tax advantage, meaning money goes in tax free.

It can grow tax free and you can pull the money out tax free as long as you have a qualified medical expense. And so because of this, this allows us to grow our money and typically we are trying to outpace healthcare inflation in the HSA so that the HSA can help us when we hit retirement age. And usually if you have a long-term time horizon, your HSA is gonna be much bigger than your.

Healthcare needs, which means then, then you can also use it as a retirement account. And so being able to use it for both things is really, really important, but allowing it to be invested and grow. And then during our younger years, we pay for healthcare expenses outta pocket is gonna make sure that we have a stress-free retirement because you're gonna have this category set up in the HSA for healthcare expenses.

Really great stuff. Also choosing the right Medicare plan. Now I am no Medicare expert at all. Uh, but making sure you compare original Medicare versus Medigap versus Medicare Advantage to see which one's gonna fit in the right way for you is important. And then planning for long-term care. So let me say this upfront, long-term care insurance is one of the most complicated insurances that are out there.

My head spends every time I read these policies, and when I look at these policies, they are frustrating to say the least. They're also very, very expensive, and so this is something. Where you can consider, you know, some sort of hybrid life insurance option in long-term care policies and or you can self-insure with dedicated savings.

Uh, that is probably the way I would compartmentalize. One of the thoughts that I have in my head currently is my HSA savings is gonna be compartmentalized for long-term care in addition to, uh, healthcare savings. So I'm trying to grow a big old HSA because of that. I wanna have a big number in my HSA because I wanna make sure that I can utilize it for various things.

And so I would be setting aside some extra cash on hand in retirement for long-term care, just to make sure that you were thinking about that. And so you can use retirement buckets for healthcare. So bucket one would be your cash or your and your HSA two would be your bond and conservative investments.

And then three could be something like your growth investments for the inflation rates and those types of things. So. Ignoring healthcare is not about just the medical bills, it's about protecting your retirement lifestyle. Because if you don't plan for this, it is a huge, huge mistake that most people need to make sure they don't avoid.

Alright, let's jump to number three. Number three is not planning for inflation. Now inflation, when you start to do the math, makes retirement feel a little bit scary to some people. Now, when I go through some of these numbers, I do not want you to become fearful because this is why we invest our dollars.

We invest our dollars in order to outpace inflation. That is the number one reason, truthfully, that we get our dollars invested into index funds, to ETFs, to dividend stocks, to real estate. We are trying to outpace inflation. Otherwise, inflation is going to eat away at our dollars. Stuff. Your money under a mattress like a drug dealer, your money is gonna be worth significantly less in 30 years than it is worth.

Now it's inflation 1 0 1, your buying power, the amount that single dollar will be worth is going to be less. So we must invest our dollars. And so when we think about this, we wanna make sure that we are accounting for inflation. So let's talk about this for a second. A 3% inflation rate. If you use something like the rule of 72, it works for inflation as well, not just investment returns, but if you use the rule of 72, which is going to tell you how long will it take for an investment to double, it would also tell you how long will it take for prices to double.

And so if. We have an average of 3% inflation rate, which is kind of the standard average that most people talk about, and prices would double roughly every 24 years. So let me give you an example here. Let's just say you bought eggs, okay? And so right now eggs are costing you what? You can get cheaper eggs for $3 at the time recording this.

Egg prices are all over the place every single month. So if you're listening to this in the future, it may be way higher, and then you can get the higher quality eggs for $5. Okay? So let's use the higher quality eggs for easy math 24 years from now. The $5 eggs. Likely if the inflation rate pace is at 3%, going to cost you $10, your rent, if it's $2,000, will likely in 24 years, cost you $4,000.

And this is because the inflation rate is rising over time. And so when we think about. Well, prices are gonna rise over time. That means I'm gonna need a lot more in retirement than I actually think I do, especially if retirement is way out. So if a retiree needs $60,000 per year today, they will need $97,000, 15 years from now, and $145,000 and even more than that 25 years from now.

If you took that and you doubled it, it'd be $120,000, 25 years from now. A little bit more than that actually. And so this is something we gotta make sure that we account for inflation. 'cause you can see how important this is. Now, this may sound daunting where I'm going through these points. So we just talked about healthcare and how the rising costs are crazy.

Now we're talking about inflation and everything is going to cost double in the next 24 years. How do I even plan for this? Investing is how you plan for this, so just keep that in the back of your head as we talk through this now. Retirees are also living longer, so inflation is gonna matter even more for them.

So a 65-year-old today has a 50% chance of living into their nineties according to the Social Security Administration, that's potentially 30 years of retirement. And so we gotta make sure that over the course of those 30 years, we account for the cost of living to double. Now, recent history also shows that inflation spikes can still happen.

So between 2021 to 2023, that became complicated because inflation actually surged 6%. Do you remember when grocery prices were just one day they felt pretty normal and you were just getting your groceries, and then all of a sudden, one year later, everything felt like it was way more expensive. That's because we had a surge in inflation right after COVID.

And during COVID, 'cause it was part of 2021 as well, in a retiree with fixed withdrawals during that period, saw their purchasing power drop by more than 10% in two years. 10% in two years. So if you had $10, every $10 that you had was now worth $9. That is a hard problem to deal with, uh, if you do not plan for it.

Also, healthcare inflation is outpacing general inflation. We've just talked about that. So it's between 5.4 to 7% and fixed income investments are at risk as well. And so according to JP Morgan's Guide to Retirement, a portfolio heavy in bonds or cash without equities loses purchasing power over time. So an example would be a hundred K in cash savings over 20 years ago has the buying power of just 60 k today.

We know that we've been talking about that, but what is really important about this is to note you don't wanna have too much in cash. So I'm talking about, you know, I wanna have five years of, of cash on hand. I am not gonna have five years of cash on hand unless I have my portfolio set to a point in time.

That makes a lot of sense. I'm not gonna keep five years in cash until I make sure that I hit those retirement goals. So my cash accumulation is gonna be towards the end of my wealth accumulation. I'm not gonna just do it all at once. Instead, it's gonna be gradual over time, and I'm gonna find ways to ladder that so that I can at least outpace inflation.

Okay? This is the reason why. 'cause inflation is a very big problem that we need to make sure that we account for. Again, don't get scared. We'll show you how to do this now. Why does this happen? Well, a lot of people have recency bias. They think everything is gonna be like it is today. It's not. It's gonna cost a lot more in the future.

They're over reliance on a fixed income. They think whatever their fixed income is gonna be, if you're on a fine line. And if you're retiring on a fine line, I really don't want you to do that. I want you to make sure you have a little bit of cushion, because over time we've gotta make sure that we are not too conservative.

There's also the psychological anchor. So a lot of retirees think in today's dollars only, they don't think in future dollars because they don't have that financial education. You have my friends now have the financial education to understand this is something I need to account for. And then they underestimate longevity.

Again, you're gonna live longer, most likely. And if you don't, it's because you have some preexisting condition or you didn't take care of your health or you have some sort of genetic condition. Uh, but it's probably gonna be something health related. And so taking care of your health early is really important.

Now, how do we protect against inflation? So stocks historically have outpaced inflation dramatically. And so if you look at the s and p 500 over the course of the last 30 to 40 years, you can see that it is right around 9.7 to 10% is what the rate of return has been over the long run. From 1926 to 2023, it was 10%.

A balanced portfolio that has, you know, 30 to 60% equities helps keep purchasing power intact. For me, I have no issue with a little bit of risk, so your boy has a huge, huge weights in his portfolio. Of stocks. I don't have a lot of bonds. I have a lot of stocks in my portfolio 'cause I wanna outpace inflation as long as I possibly can.

Also, as you can consider inflation protected securities. So when you keep your money in cash, you can consider things like tips, which is the treasury inflation protected securities, which adjust principle based on CPI, ensuring purchasing power isn't lost when we had those really high inflation rates.

Tips were great investments during that timeframe because they had really high rates of return. We had 'em up to 7.2%, uh, on some of those tips. So it's really, really cool, uh, to see how that can adjust. But they help you keep up with inflation, is what the key is. Number three is using that dynamic withdrawal strategy.

When the market is down, we're gonna withdraw less. When the market is up, we can withdraw a little bit more so that we're dynamic about when we are pulling and spending our money based on inflation. And portfolio performance, those two things actually matter. So for example, in the year of 2021, when inflation was six or 7%, I would be spending less in retirement during that year because inflation was too high, it was just too high to spend the normal amount.

Instead, my goal would be to spend a little bit less and make sure that I can actually handle that. And then also running retirement numbers at 0% inflation gives you a very dangerous, false sense of security. Do not do this, do not run it at 0% inflation. You need to make sure you factor in inflation into your retirement goals.

Uh, and this is something we're gonna be talking about a lot in Master Money Academy, is talking about how to integrate inflation into your retirement plan. 'cause it's very, very important. Now diversifying income sources is another big one. So social security has a built-in cost of living adjustment. It is going to adjust for you if you rely on social security.

A social security guaranteed we're learning very quickly. It's not, but it is something that does have that cost of living adjustment. Pensions, on the other hand, if you're relying on a pension, do not adjust. So typically, unless there's something baked in there, most of them do not adjust, and so you are gonna have to think through well.

As costs of living rises, I need to make sure I have some extra retirement money on hand. If your pension is your only retirement plan, you gotta have some extra cash from somewhere else. And so pairing guaranteed income with growth assets like stocks and bonds is gonna be very beneficial for those with a pension.

Again, inflation is the silent retirement killer, and so we need to make sure that we factor this in and avoid this mistake at all costs. Otherwise, we could be in for a rude awakening when we get to retirement age. So. One other thing I'll note is to outpace inflation. Here's one thing that, and a tip that I have talked about on this podcast before every single year, what I want you to do is I want you to look at what the inflation rate was in the previous year.

Let's say the inflation rate for a year is 3%. Okay? And so if you are investing $500 per month into your portfolio and you know that that is going to help you hit your retirement goal by the time you retire, I want you to increase. Every year, the amount that you are putting into and contributing to that retirement account by the inflation rate, why this is going to make sure that you are still contributing the same purchasing power as when you started.

Okay, so because of this, this is going to allow you to keep up with inflation, with your contributions, and so it's very, very important and I encourage everybody to make sure they are increasing the amount that they're investing, at least by the rate of inflation. Okay. Secondly is making sure your job at least gives you a raise by the rate of inflation.

Otherwise, you just took a pay cut the second year because that buying power needs to be utilized to increase the amount that you're investing every year. And so negotiating that is very important. If they don't at least give you the 3% raise, I want you to get more than that. But if they don't at least give you that 3% raise, then we need to get into negotiation mode now.

Number four is chasing returns to aggressively. This is another big mistake that people make. So there was a study of investor behavior, found that over the past 30 years, the average equity investor earned 6.8100000000000005% annually while the s and p 500 returned 9.65% over the course of the last 30 years.

That gap, which is nearly 3%, is largely due to poor timing. Buying high and selling low from chasing returns. If you are someone who is a non-passive investor, you're trying to chase returns, you're trying to buy something low and then sell at the top, most of the time you fail. And in fact, on average you lose about 3% per year by doing that.

And so becoming someone who is a low cost index fund. ETF investor or someone who just dollar cost averages it into the market, or someone who just buys target date retirement funds every single year. Or someone who goes out and buys target date ETFs or dividend stocks, whatever else, and just continues your plan over and over again.

You're not trying to time the market. You're just trying to get your dollars invested so they can grow over time. That's the way to go, my friends. That's the way to do it. And we wanna make sure that we are doing that over time, otherwise we're gonna lose out on returns. Most of us do not have the skills to be able to try to get in and get out.

In fact, during the 2000 to 2000 two.com crash, the NASDAQ fell 78% wiping out aggressive investors who piled into tech stocks. And those who stayed diversified saw losses, but they also recovered much faster. So in our episode where we talk about different portfolios, we talked through. How those portfolios rebound, and it's very important to note how those portfolios rebound so that you can ensure that you're really, really on top of it.

Okay. Three is volatility hurts retirees more than sequence risk. So research from Morningstar shows that retirees who enter retirement with a high stock allocation, meaning 80 to a hundred percent face dramatically higher failure rates if a downturn occurs in the first five years. And so. As you start to approach retirement age, making sure you have some bond exposure is gonna be important.

It's gonna be something that is gonna help you in the long run because it helps ensure that your failure rate is lower, 'cause there's less volatility within that market. For example, a retiree withdrawing 5% annually with a hundred percent stocks in 2000 would've run outta money in 20 years. So if you started during the tech bubble where it just dropped really dramatically, those first two years, you would have run outta money in 20 years if you were withdrawing 5% annually.

So making sure that you have some bond exposure is gonna be helpful to weather against those downturns. And what I'll say is boring diversification wins long term. Being a boring investor long term typically will win a 60 40 portfolio return on average, 8.8% annually. From 1926 to 2023 according to Vanguard.

And so because of this, this is gonna be kind of the safe rate of return. You have some bonds, 40% bonds, 60% stocks, and you're gonna have that rate of return over the long run, uh, that is gonna help protect you against downturns, but also help you grow at a rapid rate. So this is something I think a lot of folks need to make sure that they watch out for this mistake.

Now, why this mistake happens? Investors chase last year's winners. So a lot of times people will look at the last couple of years, so like for example, tech in 2020 and 2021 Energy in 2022 was huge AI stocks and now from 2023 to the time recording this. And so a lot of people just see that stuff and they start to get involved.

Also is fomo. Fear of missing out. Seeing others profit from fads makes people want to get in even faster. We see this with crypto all the time where if Bitcoin starts to surge, a lot of people start to pile more money in because they don't want to miss. And I, I get it. I get the feeling of that and I understand how that feels, but just making sure that you can identify that is happening is really important.

Overconfidence. So retirees with a nest egg feel they need to make it grow faster and secure their future. And so. Some people are overconfident in what the market can do and are not thinking through downturns, and then misunderstanding risk tolerance. So if you assume you can handle volatility until the downturn comes and you can't handle volatility, you gotta make sure that you understand your risk tolerance upfront.

And if you're not sure how to understand your risk tolerance, then we will do a separate episode on that. Shoot me an email and we will do a separate episode on that. Now, how do you avoid chasing investment returns? So number one is I think you need to have a written investment policy statement, meaning your policies to investing in why you're doing what you're doing.

So you're gonna define your asset allocation, you're gonna find your risk tolerance, your rules for rebalancing, and if it's not in the plan. Don't buy it. If it's not in your investment plan, don't go and buy it. So if crypto is not in your investment plan currently, you don't go out and just buy it unless it's a small portion of your portfolio.

Or if dividend stocks are not in your portfolio currently and it's not in your plan, there's no reason to go buy it. Just stick to your plan and keep moving on. You knew why, when you were level headed, why you set up this investment plan and don't react on emotions based on what's happening in the world.

Okay, two. Stick to diversification. Diversify, diversify, diversify. It is very important to make sure that we are diversified in having those core holdings. If you want to have a three fund portfolio, great. If you wanna have a two fund portfolio, great. If you wanna have a four or five fund portfolio, fantastic.

All of those are really real reasons why you want to think through this. Three rebalance instead of chasing, okay. Rebalancing can be something that is helpful for people, especially when you hit retirement age. If you wanna keep that 70 30 portfolio, you gotta rebalance every year to make sure it is balanced correctly.

Now, we've done episodes on rebalancing and the pros and cons of it. For some people it is not worth it at all if you have a small portfolio. But if you have a larger portfolio and you're at retirement age and you wanna make sure that it is balanced, I think it is important for those folks. Also, the goal of retirement is for portfolio longevity, not beating the market.

I think some people need to hear that. Lemme say it louder for the people in the back, the goal of retirement. Is for a portfolio longevity, it is not for beating the market. You're not trying to beat out the market and maximize your returns. Instead, you just wanna make sure you are in preservation mode, okay?

This is what you really, really wanna be doing. And so a portfolio that grows steadily at six to 7% is far safer than these dramatic swings, that 30 to 40% that some people have in retirement. If you're okay with that, fine. But most people are not the best when they have these rapid swings, especially when they're living on that in their portfolio.

I cannot imagine my portfolio swinging 40 and 50% and I'm sitting in retirement saying to myself, well, I gotta live on this money and my portfolio just went down 50%. What am I supposed to do here? So that would just be a dramatic thing for most people, and it would cause way too much emotion to come into play for most human beings.

Alright, let's jump into number five. Alright, number five is underestimating taxes in retirement. So withdrawals from 4 0 1 Ks and traditional IRAs are taxed as ordinary income, and according to the IRS, over 60% of retirees rely on taxable distributions from these accounts as their primary income. So many assume that they'll be in a lower tax bracket, but with required minimum distributions.

Some actually end up in higher tax brackets than they were before. And so because of this, it is really important to make sure we are planning for taxes. If you leave this portion out and you don't have a CPA in your corner, it is going to be something that could be a wild surprise for you if you don't plan for this.

Let's think about this for a second. Inflation could be eating away at our retirement funds. Healthcare can be eating away at our retirement funds, and now taxes can be eating away at our retirement funds. We gotta have a plan in place, okay? Every single person, you cannot go into retirement willy-nilly not knowing what you're doing.

And so this is why it is so important for all of us to continue to learn and continue stress testing our portfolio. And I think for most people, once you start to realize that if I do this properly, it's a lot easier than I think it's gonna be, and I don't have to stress about it as much. As time goes on, it may sound stressful in the beginning, but it's not gonna be stressful once we get the ball rolling.

Now, number two is social security can be taxed. So some people don't know this, but up to 85% of Social Security benefits can be taxable depending on your combined income within the household. So this is your adjusted gross income, plus your non-taxable interest, plus half of your Social Security benefits.

So that is taxable. And roughly 40% of Social Security recipients pay federal income taxes on their benefits according to the Social Security Administration. Now, RMDs or required minimum distributions can trigger big tax bill, so at age 73. And it's moving to 75 for some under the Secure 2.0 Act. Uh, retirees must start withdrawing from pre-tax accounts whether they need the money or not.

Uncle Sam wants to get paid, they want that tax money, and so they wanna make sure that you start withdrawing on that. So an example of this would be a million dollar traditional IRA requires a first year RMD of about $36,500. All taxable. All of it is taxable, which is why I like the Roth IRA because it grows tax free and you can pull it out tax free and there's no RMDs, but that's another story.

This can push retirees into higher tax brackets and trigger Irma surcharges on Medicare. Now, taxes can also erode away your inheritance goals, so you gotta make sure you're planning on them when you're gonna hand this money down. So for a $500,000 IRA, for example, left to adult children, that can mean a $50,000 taxable income per year added on top of their salary, potentially pushing them into higher tax bracket.

So you just gotta make sure you plan for that. And then state taxes can also make a big difference. So some states tax, retirement income, like California and New York, while others like Florida and Texas do not. So where you retire is also a big, big deal. Now, why does this mistake happen? Where people overlook this assumption of lower taxes in retirement is the biggest one.

Most people assume their tax situation will be lower and their income will drop, so taxes will too. That's not always true. So having a CPA run your scenario for you to tell you where your tax situation will be is important in having a tax strategist in your corner is also very important. Secondly is they lack diversification.

So many save only in pre-tax accounts like their 401k and IRA without Roth or taxable. Having both is really important. Surprise. RMD, so required minimum distributions. A lot of people who just open a 401k willy nilly with their employer don't know that this is a requirement that you're gonna have to withdraw money at some point in time.

And so if they don't account for those mandatory withdrawals, then they stack with social security and pensions, and all of a sudden your income is much higher than you ever thought it was. So making sure you know that, uh, is really important. And then higher taxable income can raise Medicare part D and B premiums by hundreds every single month.

Your premiums could be way higher than you thought they were because you did not account for some of this tax stuff. So how do you avoid underestimating taxes? How do we avoid this? Okay, number one. Is we're gonna diversify our tax buckets, okay? This means that we save across pre-tax, which is your 4 0 1 KIRA post-tax, which is your Roth accounts, and taxable, which is your brokerage account.

This creates flexibility within withdrawals, and so it allows you to have flexibility in retirement, which is the name of the game. I like for you to have all three in retirement if you can. Also, strategic Roth conversions, so converting portions of a traditional IRA. To a Roth IRA in lower income years can reduce future RMDs and provide tax-free withdrawals later.

Okay. And then managing withdrawals by your bracket. So instead of pulling large lump sums, spread withdrawals strategically to stay in lower tax brackets, it's gonna be very important to spread out your withdrawals in different ways to stay in lower tax brackets. And there are ways to do this with your CPA.

You can kind of strategize this. We have an episode with Katie Gaty, Tosin from Money With Katie, which also, we'll talk about this. It talks through how to pay way less taxes in retirement, how to make sure you do those strategic Roth conversions. And so make sure you check that out if you haven't heard it already.

Also you can delay social security to reduce taxable income early. I probably wouldn't do that personally, but that is up to you. That is an option for you. And then you can plan around RMDs and Medicare surcharges, uh, when you start to have to pull those out so you can project future RMDs, starting at age 73 and plan ahead with conversions and withdrawals to make sure that you can help reduce some of that taxable income.

So taxes don't stop when you retire. They just change form, and so you gotta make sure you're planning for it. Alright, number six is not having a withdrawal plan. Not having a plan to start withdrawing money. So Vanguard research shows that retirees with a structured withdrawal plan, like the 4% rule or the guardrails approach, have a 90% plus success rate in 30 year simulation.

So that's really powerful, is just having a plan in place when you go into retirement means that you have a 90% success rate. And by contrast, retirees who withdraw randomly or based on only needs saw their success rate fall below 60%. My friends, when it comes to retirement and managing your money willy nilly doesn't work.

And if your success rate is gonna drop below 60%, that's a scary place to be. We wanna make sure that we have a withdrawal plan in place. Okay? And so because of this. We need to look deeper into this. Now, why does this happen? Because most people focus on saving and not spending. They have a fear versus freedom, meaning retirees either withdraw too cautiously, living below their means or too aggressively, and tax confusion.

They don't know which accounts to use first, which leads to inefficiency. Okay? So we gotta think about this, and really it's making sure that you follow the safe withdrawal rate with flexibility. And over time we may see the safe withdrawal rate studied even more because I'm seeing new studies come out every single year, which is gonna help us tremendously when we start to reach retirement age.

But starting with a three and a half to 4% of your initial portfolio is gonna be number one, and using guardrails increases withdrawals after strong years and cut after bad years, meaning when the market is up. We are going to increase the amount that we're spending. When the market is down, we're gonna cut back how much we're spending, and having these guardrails in place where you can kind of shift back and forth is gonna be really helpful.

Now, we also need a sequence of withdrawals for tax efficiency. Which order should I be withdrawing from my accounts so that I can have the most tax efficient withdrawal strategy? Generally, the rules of thumb are number one, taxable accounts to harvest gains. Okay. Use the standard deductions two tax deferred accounts, so your 401k or your IRA and then three Roth accounts last to maximize that tax free compounding.

Okay. But this could be very different for other people based on your personal bracket management. So we'll have a total episode on kind of the sequence of withdrawals with tax efficiency. We're gonna talk all about which accounts to withdraw from in which order. We'll do a tire episode on that and kind of look at the research based on that as well.

Now, matching buckets with time horizons. Okay, so cash and short term bonds. Having two to three years of expenses I think can be really, really helpful. And then having intermediate bonds and conservative funds. For your next five to seven years. And then bucket three is your growth stocks for 10 years or longer is also something that people put into place.

And this prevents selling during downturns. And then align withdrawals with RMDs and social security. So you gotta plan ahead for those required minimum distributions at 73. And so coordinating your withdrawal, so social security and RMDs don't push you into higher tax brackets can also be very important.

And then if you automate your withdrawals, so you set up a system to automatically. Get your withdrawals either quarterly or monthly. Like a retirement paycheck is gonna help you a lot because this keeps lifestyle consistent and reduces that emotional decision making that a lot of people make. So making sure that you just automate your withdrawals is a much easier process.

Um, and then if there is a downturn, then you can adjust those withdrawals based on that. Alright, the last one. Is neglecting estate planning. So my wife and I just had a meeting for our estate plan with a new attorney because there are some complicated things that I wanna do in our estate plan. And so because of that, we just had a meeting with a, an attorney really Well.

We're gonna do some really cool things, but most people, it is fascinating how many people have zero estate plan whatsoever. And so the majority of Americans don't even have a will. In fact, only 32% of US adults have a will or estate plan in place according to a caring.com survey. And even among those over 55, less than half have completed these documents, meaning most retirees risk leaving loved ones with legal and financial messes.

Just had a friend whose, uh, father just passed away and left them with an entire massive mess where everything is going into probate. And it is a whole complicated situation because they did not have an estate plan or a will. And so it's really important to have that in place. And so now they're just dealing with all kinds of different situations that they would not have to deal with if there was just a will or estate plan in place.

Now, estate taxes can also erode wealth. The current federal estate tax exemption is. $13.61 million per person in 2024, but that's scheduled to drop by half in 2026 unless Congress extends it. Now, this could suddenly expose many upper middle class families to estate taxes of up to 40%. Probate is also costly and time consuming because states that go through probate take 12 to 18 months to settle with costs ranging from three to 7% of the estate's value.

So a $1 million estate could lose 30 to $70,000 because you don't not have an estate plan in place. Now a Vanguard study found that 20% of retirement accounts have outdated or missing beneficiaries. And so if you have a retirement account or if you have an investment account, make sure you go in there and identify your beneficiaries.

It's very important to do that. This can lead to assets going to an ex spouse, a distant relative, or even to the state instead of an intended loved one. So you wanna make sure it's going to the right person that you want it to go to. So why does this mistake happen for a lot of people? Procrastination. A lot of people just procrastinate on doing this.

They assume that people think estate planning is only for the wealthy. It's not. It's for a lot of folks, they think it's too complex with the tax laws, the trust, the legal jargon, the overwhelm, they don't wanna deal with it. And emotional avoidance, they just don't even wanna think about this happening to them.

And so they don't wanna put this into place. So here's how to avoid this mistake. One is to create or update your will or trust. So there are places like Trust and Will that you can go to. That's pretty easy to deal with and or you can go to an attorney. I started with trust and will. I had to go to an attorney 'cause there were some complex things that I wanted to do.

And so for me specifically, that's how I have to set up. Number two is you can check and update beneficiaries. So review your designations on your retirement accounts. Make sure you know who it's going to, your life insurance, your bank accounts, every two to three years. And then making sure you plan for taxes when you actually hand those things down is really important.

And then setting up. Powers of attorney, your financial power of attorney and your healthcare power of attorney, need to make sure you have the right people in place for that. And then communicate with family that they are, um, the power of attorney. Do not, you know, avoid surprises. Tell them where your money's going, what's gonna happen, all those different kinds of things.

So there's not some huge issue. After the fact. Okay, so these are all the things when it comes to estate planning. We have some full episodes on that, but I'm gonna have even deeper dives into some of the stuff I'm doing because I'm doing some unique things that I think, uh, some of you can benefit from as well.

So this is the seven biggest mistakes that people make in retirement. If you guys have any questions, per usual, make sure you join the Master Money Newsletter. You can ask your questions there. Also, get Ready. Master Money Academy is gonna be opening up to everyone. Again. Our founding Wealth builders, our beta members are.

Absolutely amazing in there. So really excited for you to see what it's like inside Master Money Academy here in the near future. So just stay tuned for that and can't wait to see each and every single one of you on the next episode. Have a great week.