The majority of Americans who retire make several mistakes due to lack of planning and not having a strategy in place. This includes taking social security at the wrong time and failing to properly transition their portfolio.
"The results can be devastating," says top retirement advisor Stephen Dissette. "Most Americans don't base their retirement on math and science and often get poor advice from financial advisors who don't always have their best interest in mind."
THE RESULT - only around 50% of Americans get to decide when they want to retire. The other half is often forced into early retirement due to health or financial issues. Stephen Dissette wants to educate Americans so they can take steps now to take charge of their retirement.
I had a chance to interview him to learn more.
1. What are the risks of retiring too early?
Many Americans spend more time planning for their family vacation than their financial future. The results can be devastating. A study by Stanford Center on Longevity shows the result of this lack of planning is that only a little more than 50% of Americans decide on when they want to retire. The other half or so is determined by health issues, problems for themselves, or their family members or job loss, forcing so many Americans into an early retirement. According to an Employee Benefit Research Institute EBRI survey, amazingly, more than 7 and 10 think we'll be able to continue to work part-time or full-time in retirement, with the reality being only one in four retirees actually continue to work in retirement. In my experience as an advisor, I have observed two major mistakes due to the lack of planning and having a true strategy in place.
Mistake number one: I believe the majority of Americans take social security at the wrong time. According to US News and World Report, in 2022, 22.9% of men and 24.5% of women started social security at the earliest possible time at 62, which generally speaking is the earliest you can take it. Unless you have severe health issues or a short longevity expectation or legitimate financial need, it often makes much more sense to defer social security to your full retirement age, typically between age 66 and 67 or ideally all the way up to age 70 in order to receive the largest social security benefit payment. This would allow according to Kiplinger, an approximate 8% annual increase in benefits to you. By employing the strategy more of your early years of retirement will be covered by your own investments, but more of your overall retirement income will be provided by the US government, leaving the opportunity for you to leave more money for your family and beneficiaries.
Mistake #2. Most Americans do not properly transition their portfolio from a growth and accumulation mode into more of an income generation and protection mode. While doing this, it would also be advisable to lower the overall risk profile from more of a higher risk, to more into a risk-averse position.
2. What is the ideal time to retire?
When is the prime time to retire? That certainly and absolutely depends on you and your situation, but the answer is relatively simple. It's when you are ready to retire. In other words, if you've done the proper planning. You've deferred your social security or will continue to defer social security. You've made the proper transition to a protection, focused and income generation portfolio. Most importantly, you have a current retirement and income strategy in place that will help you maximize your income while protecting your wealth.
3. Why do people need to transition their portfolios before retirement?
If people do not transition their portfolio from a higher risk, more growth orientation to a lower risk, more income generation and protection of wealth, it could put someone in a position of having to significantly reduce their lifestyle or quality of life due to market downturns. Sequence of return risk is the risk that the timing of investment returns can adversely affect the retirees portfolio. This risk is particularly significant for retirees who rely on their investment portfolios for income. If a retiree experiences poor investment returns early in retirement, it can lead to a rapid depletion of their savings, especially if they were drawing funds to cover living expenses. The situation can create a vicious cycle where the retiree is forced to sell investments at a loss to meet their income needs, further diminishing their portfolio's value.
4. What are the two stages of working life?
-Stage 1 or phase 1 is your working years. During those years, it's focused on accumulating your wealth. 401ks, 403bs,deferred comp plans, TSPs, rates of return. These are all crucial priorities and growing and accumulating your wealth.
-Stage 2 or phase 2 is often focused on protecting your wealth and generating income. It's important to not retire too early, having not considered all the factors and planning accordingly.
5. What are some of the biggest threats to a successful retirement?
In my opinion, I believe the following are the biggest threats to a successful retirement:
#1 Taxes. Many Americans have a significant amount of their retirement in pre-tax or qualified accounts such as 401ks or IRAs. It is important to do the proper tax planning. For many people, taxes can be a significant expense in retirement, along with perhaps healthcare or long-term care issues. Taxes do need to be addressed. For many people, a Roth IRA is a good way to diversify taxes.
#2 Long-Term care expenses. This includes in-home care, assisted living, as well as nursing home care. These expenses easily can be over $100,000 a year. According to Activity Covered, 7% of adults over age 50 have long-term care insurance, 93% of us are paying from our own assets.
#3. Stock market loss. As discussed above, strategically transitioning a portfolio from its accumulation phase to its distribution phase is very important. A downturn in the market 5 years prior to retirement or your first 5 years of retirement can have a devastating impact upon your retirement years and your quality of life. There is an important concept that most Americans are not familiar with. As discussed above, called sequence of returns risk. The sequence of returns in a portfolio, particularly early into the distribution phase of retirement, can have a significant impact upon the value of your retirement portfolio and impacts of withdrawals.
#4 Longevity. According to retirementresearcher.com , for many Americans, once you're at age 65, 50% of men are going to live to age 83 and 50% of women are going to age 86. The remaining half will live past that, sometimes significantly past that. Also of note is that married couples tend to live longer than single people. I believe that it's crucial to have your portfolio set up so that you will receive Income no matter how long you live. According to Vision Retirement, the number one fear of retirees is running out of money. Running out of money needs to be addressed as a key component of your retirement and income strategy.
Stephen Dissette is an investment advisor representative with Horter Investment Management. He is a graduate of Northwestern University and served as an officer in the United States Navy. As a young boy, Stephen watched his grandfather work until his final days, unable to retire. His father also had to work into his 70's. This personal experience ignited Stephen's passion and desire to help guide pre-retirees and retirees towards their preferred financial future.
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