Two Ways to Ruin Your Retirement

by David D. Holland


No one plans to ruin their retirement, but many do. Some people need more knowledge to handle their finances properly. And, sometimes our society’s propaganda of “gotta have it now” and “live for today” hurts those with fixed incomes and limited resources. Here are two specific mistakes that retirees often make (and how to avoid them):


Unsustainable Lifestyle Spending: Slow down. That’s exactly what some people need to hear about their finances and lifestyle spending. These are usually the same people who hate the word, “budget.” I understand . . . I can spend money as well as anyone. While you are working, you can get away with the occasional bouts of excessive spending because you have the time and the cash flow to replenish the deficit. However, when you stop working, you must make sure that your spending doesn’t exceed your income. If your outflows exceed inflows, the difference has to come from either debt (such as credit cards, which is just delaying the problem) or from a reduction of your retirement assets. The more you deplete your assets, the greater the likelihood you’ll run out of money. That is a serious threat to your retirement. A common source of stress among retirees (and arguments between spouses) is that they don’t know how long their savings will last and how much they can draw out each month. 


How to Avoid: Build a financial plan and review it annually. A well-constructed financial plan is going to give you a year-by-year projection of how much consistent income your assets can provide (of course, you’ll need to make sure your expenses don’t exceed that income). This knowledge can be liberating and you can be more confident about what you can spend without running out. You can plan on that remodeled kitchen, new car, weekly golf game, travel − and even long-term care and inflation.


While I don’t presume to be a relationship counselor, I have worked with hundreds of retirees, many of whom were couples. From this experience (and with apologies to Dr. Phil), I will say that spousal harmony seems to increase proportionally with financial certainty. The more prudent spouses seem to relax once they know that they’re not going to run out of money and the more carefree spouses are happier because they get to spend and have fun, which is what they wanted anyway. Planning can be good for your finances and can be very good for your marriage. Don’t fight. Get a plan.


Excessive Withdrawal Rate: If you take too much from your investments and savings, you will run out of money. In other words, you can’t get milk tomorrow from the cow you eat today!  I’ve had the unpleasant task of telling some retirees that they were taking too much income from their portfolios. I delivered the bad news not because I like telling people “no” or that they “can’t afford it,” but to keep them from running out of money in the middle of their retirements. Some financial folks may say you can draw 4 to 6% a year and not run out of money in retirement. I don’t agree and here’s why:


  • While the actual amount will vary each year, we should budget for at least a 3% increase in inflation to have a realistic long-term plan for income. 


  • The typical retiree has a lot of fixed expenses. If you are drawing 6% from a $300,000 investment portfolio, you are taking $18,000 to pay your expenses. If your portfolio’s value were to drop to $250,000, then that same 6% is just $15,000. I simply don’t believe that the majority of retirees can slash their expenses so easily (and I don’t think they should have to).
  • Moreover, drawing 6% from your investment portfolio can cause severe erosion to your portfolio’s value during extended downturns in the market. Take the recent ten-year period of 2000 through 2009 as an example. As most investors will recall, the stock market fell nearly 50% during the first three years of this ten year period. Let’s say you drew $18,000 each year from a $300,000 portfolio (let’s also assume you invested like the S&P 500 index except you paid annual fees of 2%). By the end of 2009, you’d only have $52,000 left. If, instead, you had increased your withdrawals each year to account for 3% inflation, you’d only have $26,593 left. Who has the bravado to stick with such a risky scheme for income? Nobody I know. How about you?


How to Avoid: First, get a plan with realistic income projections that include inflation. Second, don’t invest too much directly in the stock market. Third, make sure that a significant portion of your retirement income comes from fixed sources that don’t depend on what the stock market does each year.


Of course, these are just two of the financial threats that can turn your “golden years” to lead. We’ll discuss additional threats to your retirement security in future columns.


David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to