For the past couple weeks, this blog series examined the individual nature of establishing retirement income goals. Finding no “magic bullet” number for the needed size of a “nest egg,” we concentrated on sources of retirement income in order to arrive at an individual income goal. We discussed the components of income, as well as the formulas for achieving success.
Today we ask the age-old question, “What could possibly go wrong?" The road to financial independence is paved with perils, some more controllable than others. Here are a few potential pitfalls for long-term planning:
- Social Security is inadequately funded to maintain current levels beyond the year 2034, and a reduction of benefits for retirees may result (Congress can fix this, but I am not holding my breath)
- Pensions (Defined Benefit Plans) are becoming scarce, as employers convert to Defined Contribution Plans such as 401(k)s and 403(b)s, placing the onus on the employee for long-term investing success
- Educational Loans are hindering the savings levels of many Americans, and are not only affecting the very young; 35% of student loan balances are owed by people over age 40 (from MIT AgeLab)
- Divorce, which can split assets and interrupt planned accumulation at any age; 34% of divorces occur between couple married at least 30 years, and 12% are among those married 40 or more years (from Pew Research)
- Bear Markets can happen just before or just after retirement, causing disruptions in planning the “4% Withdrawal Rule”
- Involuntary Retirement, which affects 1 in 4 Americans, whether from layoff, illness, or other factors, interrupts the last years of planned accumulation
- Unexpected and Uninsured Expenses emanating from disasters, illnesses, family members’ needs, etc., can rapidly deplete assets
- Inflation has occasional spikes, and can last for prolonged periods, driving down the value of your monthly income
The best-laid plans of mice and men, as Robert Burns noted, often go astray. Van Wie Financial has been party to some of the most successful retirement planning imaginable, but we have also witnessed situations where one or more of the above problems above have interrupted potential successes. We believe that planning should include a “fudge factor” for financial independence. For many young people, we are excluding consideration of Social Security benefits (at their request) when planning for financial independence. They believe that if they do receive any eventual benefits, it will be icing on the retirement cake. As much as we believe that there will remain some level of Social Security benefits, who could possibly argue with an approach so conservative that it doesn’t rely on Social Security?
Similarly, we treat expected inheritances as if they may never happen. In our lingo, it is a good to plan FOR an inheritance, but it is never good to plan ON an inheritance. Parents and grandparents have ways of spending down their net worth, often due to illness. They are also capable of changing their opinions regarding who is worthy of receiving an inheritance. As we said, what could possibly go wrong?
Whatever your age, and regardless of how much planning has already gotten done, there is an ongoing need for financial planning and continuous review for anyone interested in achieving their goal of true financial independence. No longer is a financial plan simply a printed document that hides on a shelf after a single reading. Modern planning is done with clients on an ongoing basis, and utilizes software that is adaptable enough to keep up with changes, both in personal lives and in markets. Trained Certified Financial Planners™ have the expertise and the tools to guide the process.
Van Wie Financial is fee-only. For a reason.