WARNING: Top 5 Most Expensive Purchases Retirees Often Regret
Perhaps the four most dangerous words when it comes to budgeting, and cash flow are:
“Because I deserve it.”
Deciphering between “wants” and “needs” goes back to Budgeting 101. But it’s especially relevant when it comes to retirement planning.
We often see that some pre-retiree clients who should be asking “will I have enough money in retirement” are instead skipping ahead to fantasies about treating themselves with all the things they weren’t able to have in their working years.
When it comes to retirement and celebrating your achievements with a well-deserved reward, it's important to remember that there are both healthy and unhealthy ways to go about spending.
Today, I’m addressing some of the challenges that often come up when retirees aren’t sure how much retirement money they can actually spend without burning through their assets.
Bringing intention to your spending during the 3 phases of retirement
Research indicates that there are 3 phases of retirement. The beginning phase of retirement, known as the go-go days, is, by and large, the most active phase of retirement. This is also the place where spending will be higher due to treating yourself with big-ticket items like a new RV or vacation home, traveling more frequently and crossing destinations off your bucket list. While this phase can be filled with fun, it often comes with a large price tag!
As I discussed in a previous blog post on retirement spending, using a strategy like the Guardrail Retirement Strategy can help make sure you’re on track and able to meet these higher demands of expenses in your early years of retirement. In the latter of the 3 phases of retirement, you may find yourself spending a bit less than expected, which can give you more peace of mind as you plan for retirement now.
⚠️IMPORTANT: Before you read on, I want you to know that this blog post is not designed to be an attack on your spending or lifestyle, nor is it intended to tell you what you can and cannot spend your money on.
After all, you worked hard, you saved and are preparing to embark on an incredible retirement journey!The goal is to bring awareness to the most common mistakes and regrets retirees experience.
REMEMBER: Conscious spending is one thing. Reckless spending is another.
Therefore, if your cashflow supports it, and you’ve had your eye on say a boat or a vacation home, and you’ve been diligently saving and dreaming of one day purchasing it, then it’s best to meet with your Financial Planner to review your assets to see the impact of this major purchase.
When discussing the importance of spending decisions, for both major purchases and day-to-day living expenses in retirement, it’s helpful to recall the words of New York Times best-selling author, Ramit Sethi:
“Conscious spending isn’t about cutting your spending on everything. That approach wouldn’t last two days. It is, quite simply, about choosing the things you love enough to spend extravagantly on—and then cutting costs mercilessly on the things you don’t love.”
Understanding the Impact of Sequence of Return Risk in Retirement
True or False: The amount of money you spend in the first few years of retirement, can significantly impact the rest of your retirement.
True
2. True or False: The risk of negative market returns occurring in your final working years and/or early in retirement can also have a significant impact on your portfolio and your lifetime income.
True
When it comes to retirement income planning risk, the risk of overspending or experiencing negative market performance is known as the “Sequence of Return Risk”.
US Bank summarizes the Sequence of Return Risk as:
Because managing assets in retirement can be a far more challenging task than when your focus is on asset accumulation, it’s critical to have an income strategy in place.
Unlike when you were younger, once you retire, you no longer have the luxury of time to overcome temporary market fluctuations by keeping your money invested.
Depleting a portion of your assets each year to fund daily living expenses in retirement spending makes it more difficult to overcome market declines.
Why is the sequence of return risk in retirement important?
Whether you are withdrawing from your portfolio to pay for a large item or experiencing significant market volatility, when you pull money out of your portfolio (especially during a down market), you’ve robbed your future portfolio of the ability to recover as it could during your working years when you were accumulating assets, contributing to it regularly and not withdrawing from it.
Additionally, selling during a down market requires you to sell more investments to raise a set amount of cash.
Source: RetireOne.comClosing thoughts on the Sequence of Return Risk in Retirement
The reason “Sequence of Return Risk” is even worth mentioning, is not to scare you away from purchasing that dream item you’ve been eyeing, but rather to provide insight and context to the impact a large purchase can have on your retirement nest egg.
Two other things worth noting.
First, if you’ve already met with your Financial Planner and your cash flow supports a large purchase, then that is great, and hats off to you!
The intention of this blog post was to bring awareness to those who hadn’t started planning yet and are considering making a major purchase. A large purchase can have a big impact on how much retirement money you’ll have to last you throughout your life.
Second, I know that each retirement plan is uniquely designed and that all of us have different desires, goals, and visions for how to spend our hard-earned money. But, beware, there are some common pitfalls that retirees should keep in mind as they plan.
TOP 5 BIG-TICKET ITEMS RETIREES OFTEN REGRET
Consistently overspending on luxurious travel
Don’t get me wrong, once-in-a-lifetime trips are great!
But where retirees most commonly run into problems, is making big, expensive, elaborate trips a consistent and regular part of their new retirement lifestyle.
As mentioned earlier in the “Sequence of Returns Risk in Retirement” conversation, overspending on multiple trips too early in retirement may leave you with a limited amount of money to last for the next 20-30 years.
When planning out dream vacations, most people tend to underestimate all of the minor expenses that are often overlooked but add up. This can include things like snacks and drinks, tips, resort fees, costs of excursions, shuttles, taxis, additional transportation, etc.
💡PLANNING IDEA: Try spreading out your retirement travels by staggering your big trips out every other year. During your off years, you could travel stateside and cut down on your spending.
Additionally, during times of high inflation or a stock market downturn, you could delay a big international vacation for a year, and instead opt to do something on a smaller scale. Doing this will help give your portfolio time to recover and could result in much more retirement income down the road and less stress on your portfolio.
2. Buying Too Big of a Dream Home or
Overbudgeting for Renovations
It seems reasonable in retirement to finally reward yourself with that new house on the lake or to start working on that renovation you’ve always wanted to do. But before jumping in, be careful as that dream could quickly become a financial nightmare.
Once you’ve signed on the dotted line and financed the project, keep in mind, you’ll also continue spending big on upkeep, maintenance, property taxes, homeowners insurance, and repairs that will eat into your retirement savings.
Furthermore, if you can't pay for the new house or project in full, you'll face significantly higher interest rates to finance it.
It’s best to take all of these factors into consideration before buying or renovating as you may end up moving anyway, either because you’ve found the house is now too big for you and your spouse, or because, as we like to say in retirement planning, “Grandkids (and family) tend to win out,” and you want to be closer to them.
3. Expensive Toys like a Luxury Car, Boat, or RV
What do a big new RV, a fancy boat, and a luxury sports car, have in common? All of these fancy toys come with a big price tag and the cost to insure and maintain them isn’t cheap either.
I’m sure you’ve heard of the famous one-liners when it comes to boats and RVs.
RVs: If you have to ask how much it costs to fill it up, then you can’t afford it.
Boats: What are the two happiest days of a boat owner’s life? The day they buy it and the day they sell it.
Let’s also remember, that most, if not all of these purchases rapidly depreciate in value. And eventually, there may come a time in retirement when the physical limitations of aging can make operating these toys no longer possible or desirable.
💡PLANNING IDEA: Having recreational toys is a great luxury to be able to have in retirement and there are a number of ways to still enjoy these toys without taking on the large financial burden such as renting them for a weekend or purchasing a slightly used model.
4. Ongoing Financial Support to Adult Children
Dave Ramsey once said, “Your children can take a loan out to pay for college, but you can’t take a loan out to pay for your retirement.”
Much like the rules on an airplane of “securing your own oxygen mask”, it’s important to remember that before taking care of others, you must first take care of yourself and your financial security. While you may do a great job of keeping your average spending in retirement relatively lowit can be hard to say no to adult children in need.
Having your children experience a one-time gift for a wedding or a down payment on their first home is a wonderful thing and is something most parents list as a financial goal.
But continuing to fund your adult children’s day-to-day lives is another thing.
In the kindest and most loving way possible, it’s important to draw strict financial boundaries with your adult children, so that you do not jeopardize your own financial future.
Note: What can be helpful is to give your children (if they find themselves in this situation) the gift of meeting with a financial or budgeting coach to help them create a plan to get on track financially. If you live in the Orange County area and want to gift your loved ones a financial planning session, get in touch with us here.
5. A Vacation or Second Home
Having a second place to snowbird or travel to sounds like a dream, but you’ll want to make sure to factor in all the hidden costs like double the maintenance, double the utility expenses, and double the property taxes, now that you have two homes to look after.
Additionally, you’ll want to account for all the travel costs back and forth between the two locations, as well making sure you have helpful neighbors or relatives available to help take care of whichever property you’re not at.
It is very common as retirees age for one of the two locations to begin losing appeal because they either get tired of traveling, find it difficult to find health care services for both locations, or want to be near community and family on a more frequent basis.
💡PLANNING IDEA: Test it out first! Try taking advantage of Airbnb or VRBO’s extended stays and find a location you’ve always wanted to live in for a few weeks or a month to see if you like it. Visiting for longer periods of time is a great way to gain the upside of being a snowbird, without having any of the downsides that a landlord face.
Enjoy your retirement years with no regrets!
Not sure where to start when planning for your retirement years? We’d be happy to guide you and your family to ensure you can retire comfortably without outliving your hard-earned assets. Our team proudly offers financial planning in Orange County and beyond to help individuals reduce taxes, align investments, and retire successfully. Click here to schedule a call today!
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