Pitfalls to Avoid

Why Just Having a Large Lump Sum Isn't Enough for Your Retirement


Potholes to Avoid on the Road to Retirement

With a large-sized portfolio in hand, you may feel like your financial future is set, but plenty of potholes exist to avoid on your road to retirement.

The first one is undisciplined spending. When you retire, you have newfound freedom and time. This might prompt scheduling expensive trips abroad, increasing your travel schedule to visit friends and family, or finally indulging in that classic car you have had your eye on for years.

Depletion of a nest egg for income too quickly isn’t just a remote possibility. Headlines show that consumer debt is near an all-time high, and many Americans have little-to-no retirement savings, according to the U.S. Government Accountability Office.

While these may be rewarding pursuits, putting the brakes on unbridled spending and developing a long-term retirement spending plan will help prevent the wheels from coming off during your retirement journey.

Who knows what health challenges or emergencies you will face during in the coming years? And, if your money is unprotected, how could sequence risk affect your income security in the event of a market down-turn?

Converting a Nest Egg Lump Sum into Lifelong Retirement Income

For many retirees, another common blunder is presuming that your bucket of money is enough to last in retirement. It has to last a lifetime, and our lifetimes are getting longer. 

Examination of mortality data from the Society of Actuaries Retirement Participant 2000 Table determined the likelihood of 65 year olds living to certain ages:

  • A 65 year old man has a 41% chance of living to age 85 & a 20% chance to age 90

  • A 65 year old woman has a 53% chance of living to age 85 and a 32% chance to age 90

  • If the man and woman are married, there is a 75% chance one of them will live to age 85 and a 45% chance one will live to age 90

  • One of them has an 18% chance of living to age 95

A Roadmap for More Financial Certainty

​A nationwide poll by Kiplinger's Personal Finance suggests that fewer than 50% of retirees lack a decumulation withdrawal plan. A plan should allow you to visualize your cash needs until your demise. Unfortunately, most financial planning software produces page after page of information that few people bother to read. That's why I recommend a report fewer than 10 pages with large, colorful graphs that clear explain its purpose.

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Analyzing cash flow is the first step in building a retirement plan. Most Americans will have Social Security income. Others may have a pension guaranteed for their lifetime or the life of their spouse. These sources of income are predictable after accounting for cost of living increases and the effects of inflation. If a gap exists between the amount of money coming in vs. the amount going out, creating a personal guaranteed pension may be an ideal solution. In the Retirement Triangle above, note that an income annuity is depicted to take care of Core Expenses. 

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