Many older adults have high levels of regret about their finances, according to responses to a 2020 survey of Americans over age 50 conducted by the University of Michigan Health and Retirement Study.
The survey found that nearly 60% of participants regretted not saving more for retirement. Forty percent regretted not buying long-term care insurance, 37% regretted not working longer, and 23% regretted taking Social Security too early.
Financial regrets may be common, but they don’t have to be inevitable. And even if you have regrets about how you prepared for retirement, these errors don’t have to be permanent. There are options for course correction, even after you’ve stopped working.
Here are four tips to help you avoid or mitigate financial mistakes in retirement.
1. Plan for long-term care expenses
One mistake that clients may make after retirement is not considering long-term care planning,
including the potential need for nursing home or assisted living expenses. These costs can deplete your assets and put a strain on your loved ones.
Someone turning 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years, according to the U.S. Administration on Aging. The average person requires care for three years.
You may want to explore options for long-term care insurance and create a comprehensive estate plan that addresses the potential costs of long-term care.
2. Account for inflation
Nearly two-thirds of retirees said inflation and the rising cost of living was the “biggest financial shock” in retirement, according to surveys conducted from January to March 2023 by Edward Jones and The Harris Poll.
Respondents cited inflation as a shock more often than the combined total of the next three top
responses — unexpected medical or dental expenses (22%), major home expenses or repairs (20%), and significant declines in the value of investments (19%).
If your earlier retirement planning didn’t account for high inflation, it might be time to re-examine your retirement finances.
3. Keep managing your investments
Whether it’s to deal with inflation or for any other reason, you might want to revise your investment and/or withdrawal strategies to help your money last in retirement. You should have a retirement income plan in place that matches your current lifestyle.
4. Prepare for surprises
Even with a good retirement income plan, your finances need to be ready to deal with surprises. Unplanned expenses such as a roof replacement or a large unexpected medical bill could cause problems.
Some of these problems might be harder to deal with now than in the past. Higher inflation means those unexpected expenses might cost more than before, while you’re also spending more on the day-to-day cost of living.
Plan to put some of your retirement income aside for unforeseen costs. An emergency fund of three to six months is generally sufficient to cover or defray these expenses.
By Ken Russell Jr.
Successful entrepreneurs are unique individuals with an affinity for risk-taking behavior that assists them in building their wealth. However, some of these very same traits can become a detriment to maintaining the assets they’ve created. There are three key characteristics that can often turn successful entrepreneurs into unsuccessful investors:
Control: Entrepreneurs, especially those who found their own companies, are known to be extremely controlling people. After all, they’re trying to bring their own vision to life and take the reins of numerous aspects of their business. Even if they employ others who assist them in running their company, the entrepreneur is the final arbiter of virtually every material business decision.
When an entrepreneur is accustomed to being the decision maker on so many financial considerations involved in running a business, they’re often less willing to cede control of their investment decisions. They might also be overconfident in their own abilities, leading to the problems attendant in emotional investing.
Concentration: Doing one thing, and doing it extremely well, is frequently the key to entrepreneurial success in the United States. A concentrated focus on “owning” your business space is a proven path to growth.
While this focus is highly beneficial in running a business, it can lead to problems when entrepreneurs try to manage their own investment decisions. An entrepreneur may be an undisputed expert in the operations involved in providing a service or bringing a product to market, but that won’t often translate to an ability to navigate the complex issues involved in investing.
Use of Leverage: Entrepreneurs usually invest some of their own capital to start or expand a business, but they also tend to rely heavily on financial leverage. “Using someone else’s money” is an excellent way to increase the return on one’s own equity ownership in a business, as it preserves a founder’s personal capital, serves to spread some of the financial risk to either lenders or note holders, and supports the growth of the business.
Leverage can also strongly influence an entrepreneur’s approach toward investing, and it may be difficult to break this behavior later. They may be willing to favor a more conservative approach to avoid losing their own capital or the capital of their investors, but they may also favor a riskier approach when using borrowed money — a behavior which can carry over when investing personal assets.
From Entrepreneur to Investor
Now let’s say that a successful entrepreneur has reached the point where he or she is able to monetize their ownership in the business, perhaps through an outright sale or a significant distribution that transforms their illiquid investment into a fully liquid one. While this transaction can leave them with a sizable amount of capital, the characteristics noted above can significantly impede their ability to maintain or grow their assets.
For example, many years ago, my team and I visited with a nationally known businessman that had just sold his company for a significant amount of money. My team pitched him and his family on our investment process and a host of other wealth preservation services. His response was something along the lines of, “What you do sounds fabulous, but if you did that my sons would have nothing to do!”
He proceeded to trust his sons with the management of his wealth. Over the next decade, their poor decision making had cut the value of his portfolio in half.
While it may take some time to accomplish, entrepreneurs can abandon the characteristics that made them successful in business when weighing their investment options. This will significantly increase the chances that they can sustain and grow their assets. Here are some tips on how to do so:
Cede control and heed a financial advisor: Here’s the hard reality: while you may have been a professional business owner when you were running your company, you will be using an amateur advisor if you try to manage your liquid wealth by yourself. It’s akin to leaving the management of your company to an intern when you go on vacation.
When you use a financial advisor, you’re still directing the strategic goals of the investment process. However, you’re ceding control of the day-to-day portfolio management process to professionals, who will be taking steps to ensure the sustainability of your money for decades.
Less concentration, more diversification: The business concentration that created your wealth in the first place will jeopardize it if you remain concentrated after you’ve acquired more liquidity. Sticking with what you know can be a form of risk mitigation when operating a business. Following this same strategy in public equity investing can be a fatal flaw.
Take steps to diversify your investments as soon as possible. For example, if you receive stock as part of the sale of your company, sell it as soon as your holding period requirements are met. If you’ve made your money in the private healthcare or services sector, don’t over-invest in the public side of those sectors when your wealth becomes liquid.
Leverage your time, not your money: The use of borrowed money is an excellent return on investment optimizing strategy when running a business. But the continued use of margin debt in an equity portfolio is an unnecessary risk-taking behavior.
To be sure, there may be occasional – and temporary – reasons to apply leverage to a portfolio if it involves optimizing the timing around tax deferrals or cost basis changes. But the continued use of leverage in an attempt to enhance portfolio returns – or fund one’s lifestyle – can have disastrous outcomes for your liquidity at the worst possible time.
I’ve been in this industry long enough to witness unforeseen market events in 1987, 1998, 2000, 2007, and 2020. These events generated countless margin calls which decimated investor portfolios.
An unleveraged portfolio has the ability to wait out equity market downturns. A nervous lender does not afford a leveraged portfolio the luxury of time.
To learn more about how a financial advisor can help you invest the wealth you’ve created through your business, contact Grey Ledge Advisors at 203-453-9075.