The 7 Financial Sins in Retirement
The first of a two-part blog series
Since antiquity, humans have consulted memorable enumerations to help guide their behavior. One of the oldest and most famous is the seven deadly sins – made popular in art, literature and pop culture, from Dante’s Divine Comedy to the movie Seven. What makes them so unforgettable and effective is that they are meant to serve as directions down the road to eternal damnation.
The seven deadly sins are also known as the capital vices. Understanding how they have become enrooted in people’s psyches can be helpful when learning to avoid financial vices that can corrupt your efforts to preserve your retirement capital. Therefore, here’s a list of the 7 Financial Sins in Retirement that could lead to monetary damnation.
In a global study by HSBC, more than a third surveyed said poor planning resulted in a lower retirement income than expected. One example is procrastinating in your savings plan for retirement. Lower income potentially means unfulfilled retirement aspirations or a decrease in the sustainability of savings. In that case, you may be tempted to take more risks than necessary to fund living expenses. Thus, improvisation during retirement essentially opens the door to all the financial sins that follow.
Is it surprising “greed” finds itself on another collection of dangerous temptations? The pursuit of greater money comes with greater risk. Retirement is an inopportune time for excessive risk because it is difficult to recover from a large loss with limited means of income and a shortening time horizon. If enough funds for retirement have been accumulated, then it is no longer necessary to try to aggressively grow money.
Conversely, it’s possible to be too financially prudent in retirement. Investing in only low-risk asset classes such as investment-grade bonds, CDs or money-market funds may seem sensible for preserving wealth. However, because risk and return are related, their lower risk means a lower expected return, making these investments vulnerable to the corrosive effects of inflation.
Debt is a growing problem for adults of retirement age. The National Center for Policy Analysis found that from 1989 to 2010, the average credit card debt for people ages 65 to 74 grew 185%, from $2,100 to $6,000. Meanwhile, more than a third had a mortgage or home equity loan, forcing them to allocate 4.3% of their overall expenses toward interest payments.
Retirement is a transition from saving to spending. The periodic amount withdrawn from savings accounts for living expenses is known as a withdrawal rate. What that amount should be essentially depends on your retirement lifestyle. Withdrawing a high rate for extravagant purchases increases the chances that retirement funds run out. Even when in the “spending” years, spend wisely.
The unfortunate truth is that a sizeable nest egg is a target for criminal activity. According to a study by MetLife, older adults lost $2.9 billion to fraud in 2011. On top of scam artists, you need to exercise caution with the people you include in financial matters, especially as mental faculties wane.
Insurance products such as annuities are attractive for their ability to provide guaranteed income during retirement. However, they can be very illiquid investments. Buyers may incur high fees for early or large withdrawals. Access to cash is important as unexpected costs are likely during retirement. An Ameriprise Financial survey found unexpected events cost $117,000 on average for people 50 to 70 years of age. The costs cited ranged from medical bills to home repairs.
Have a financial sin you want to add? Share this blog with your suggestions.
And, find out on Thursday how you can avoid the 7 Financial Sins of Retirement when we publish the second part of this blog series: The G.R.A.N.D.P.A. Rules for Redemption.