Think Halloween is Scary? Try Retirement

Jack-o'-lanterns carved from pumpkins and lit with tea lights

What’s so scary about retirement?

According to the clients I’ve worked with over the years…plenty.

From losing your working income to rising healthcare costs. There’s a lot to make you jump like a teenager watching a scary movie. So what do current and future retirees have to worry about? Quite a bit actually.

Here’s a few things that make retirement scary:

1. Loss of Income
Losing the ability to earn income can be pretty scary. Think about it. You’ve worked for decades receiving a check every two weeks, and all of a sudden it isn’t there anymore! When you retire you’ll have to make the shift from earned income to portfolio income. Careful spending of that portfolio income requires restraint.

2. Rising healthcare costs
At retirement your healthcare costs are higher than they’ll ever be. Medical care and prescription drugs can be hundreds of dollars a month. When you have a finite amount of money, this becomes a pretty fearful situation. If your health requires a long-term care stay, then that will add about $50-80,000 extra to your annual living costs. Positively spine chilling.

3. Outliving your money
I tell clients all the time, you don’t retire on your portfolio value, you retire on the income it produces.  You should keep your withdrawals as low as possible. That way you will reduce the horrifying possibility of outliving your money. Most advisors recommend withdrawal amounts around 4% annually. So that means that a $1 million dollar portfolio will create $40,000 of annual income.

Market corrections like the one we saw in 2008-2009 affected many retirees income. That’s because when an income portfolio declines, you still need to keep your annual withdrawal amount the same. So that million dollars drops to $800,000, then 4% withdrawal is $32,000 annually, not $40,000. Many retirees overspent and did not adjust.

4. Rising cost of living
Everything gets more expensive all the time. The cost of water, energy and food have all seen increases. With moderate inflation at 3%, prices will have increased measurably by the time you have been retired just ten years. You’ll still need to have equities in your portfolio to combat inflation. It’s one of the only asset classes that earns real returns above taxes and inflation.

5. Lack of purpose
The scariest thing I’ve ever seen in retirement is people who have little to no purpose for their lives. I’ve seen retirees with no hobbies or interests that just sit around their house all day. You must have a vision for your retirement, just like you did when you were younger and employed. Travel with friends or find something that you can get passionate about.

Retirement can be a very scary time. Don’t let fear overtake you if you are retired or planning to retire in the near future. With a little planning it can be the most rewarding time in your life.

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