4 Real-Life Examples of How Retirement Planning Can Innocently Go Wrong

Even the best intentions can go awry.

Below are 4 real-life client examples we’ve seen at Linscomb & Williams. If you're handling your finances on your own, take these stories into consideration and really think about whether you’re up for the task. Sometimes, it’s simply missing a review that can lead you down the wrong path.

1. A Temporary Decision Becomes Permanent

It is amazing how often we run into families where a “temporary” decision has been made to suspend contributing to a 401(k) plan, only to inadvertently become permanent. 

Last year, a couple in their early-50s came to us in a bit of panic over their retirement preparation. What we learned during the fact-gathering process is that around age 45, they discontinued making 401(k) contributions at work, when their second child entered college, since they were facing two years of overlapping simultaneous college bills while two children attended school. They needed the cashflow relief of suspending retirement contributions to bear the burden of the college costs, not wanting their youngest daughter burdened with student loan debt after college. That motivation is certainly laudable, but the planning was not optimal.

  • First, they felt so much relief after the two years of overlapping college bills ended, that they “forgot” to resume their 401(k) contributions and ended up missing about five years of tax-deferred contributions, as well as employer-matching funds. The projected compounded cost of that slip of mind calculates to more than $250,000 by the time they reach retirement in their mid-60s.

  • They failed to consider that suspending their pre-tax contributions to their 401(k) actually caused their income taxes to increase during those high-cost education years, putting further hidden pressure on their cashflow.
  • An alternate strategy might have been to make prudent use of parent-supported student loans for their younger daughter and simply commit to help her after graduation with gifted funds to amortize and pay off the college debt. Such a strategy spreads out the cashflow burden of education over more years, and avoids skipping the receipt of employer-matching funds in the 401(k) plan. 

Advice for the DIYer: Make sure to review your plan on a regular basis and update it when life changes.

Check out our new guide: Retirement Catch-Up.

 

ARE YOU ON THE RIGHT TRACK TO RETIREMENT? CONTACT THE TEAM AT LINSCOMB & WILLIAMS AND START A CONVERSATION.

 

2. You Pay for Things You Don’t Even Use

Take a realistic look at your budget and expenses to identify areas where you might start cutting back without significant lifestyle pain. Even small changes can have a big impact in the long-run. In our experience, we’ve seen clients that:

  • Are continuing to pay premiums for life insurance that was taken out when they had a young family that they no longer need at the same level

  • Are over-paying on homeowners’ insurance because they failed to alert their insurance company to updates, which would make discounting available (new roof, back-up generator, alarm system)

  • Are simultaneously carrying balances in savings accounts at virtually zero interest while balances are outstanding on credit cards, accumulating interest at 14 percent interest or more

Advice for the DIYer: Stay on top of your budget, and update it accordingly. 

Read our recent blog post: Eliminating Debt to Increase Retirement Savings.

3. A New Cost of Living is Not Taken into Consideration

During the pandemic in 2020, our team was approached by a couple who was envisioning pulling the trigger on an early retirement. They had essentially done their own planning over the years, and had accomplished an effective accumulation of retirement assets of about $3 million. They came to us wanting a second opinion on whether their goals were realistically attainable. 

The main issue was where they would spend retirement (either remaining in Texas, moving to California to be near extended family, or possibly living in Hawaii where the wife’s extended family resides). What our analysis revealed is that their lifestyle goals for an early retirement were completely realistic in Texas, a “stretch” in California, and essentially a “pipe dream” in Hawaii. The differences boiled down to two key factors:

  1. The cost of living varies widely between those three locales for what is essentially an equivalent level of lifestyle.

  2. State tax burdens vary widely as well, making California and Hawaii considerably more expensive than Texas.

Now, this doesn’t mean that everyone should retire in Texas. But it points out the importance of thinking through all of your options and doing careful analysis. 

Advice for the DIYer: If you haven’t yet established a retirement plan, talk to a financial advisor about your goals, concerns and current situation and determine the steps you need to take to make your retirement dreams reality.

Check out our new guide: Retiring in the South.

4. You are Too Risk Adverse

When it comes to risk, the mistake we more commonly see is not families who have retirement portfolios that are positioned too aggressively, but rather, the tendency to over-simplify the challenge with an attitude like, “I cannot afford to lose this, so I better not take any risk!” 

Your acceptable investment risk should be evaluated in light of the expected level of withdrawals per year. Far too many families set their investment policy using outdated “rules of thumb.” Perhaps the most well-known is the idea that one’s allocation to invest in stocks should be the percentage represented by the mathematical formula of 100 minus your age (i.e., if you are 65, your allocation to stocks would therefore be 35 percent). This approach is unfortunately a dreadful over-simplification.

Advice for the DIYer: Research any investment strategy you use, even if it’s a standard rule of thumb, because while generally accepted, it still might not work for you. 

Read our recent blog posts: 

Rules of Thumb to Forget: Number One …

Rules of Thumb to Forget: Number Two … 

Does the 4 Percent Rule Still Work? Houston Wealth Manager Weighs-In

The Bottom Line

If you have questions about your investment strategy, contact the team at Linscomb & Williams and start a conversation. A little information can go a long way. 

Schedule a no-obligation meeting now.

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J. Harold Williams, CPA/PFS, CFP®

J. Harold Williams, CPA/PFS, CFP®

J. Harold Williams is Linscomb & Williams' Chairman.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.