Retirement planning requires considering many variables. Unfortunately, many people overlook important considerations and create problems that could have been avoided or minimized.
On American Family Radio's Faith & Finance program, SMI's executive editor Mark Biller discussed the most common oversights.
Click the play button below to listen. Scroll down for the transcript.
Faith & Finance with host Rob West airs each weekday morning on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(More radio appearances by members of the SMI team are posted on our Resources page.)
Transcript
Rob West:
It said that "We learn from mistakes, not success" — but do you want to experience that with your retirement savings?
Hi, I'm Rob West. Mark Biller joins us today to help you avoid some of the most common retirement-planning mistakes.
Then it's onto your calls at 800-525-7000. This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (theme music ends)
Well, Mark Biller is the executive editor at Sound Mind Investing. He and his team are devoted to helping you apply biblical principles to your investing, so you can get retirement right the first time!
Mark, great to have you back with us.
Mark Biller:
Thanks, Rob. Good to be back with you.
Rob West:
All right, Mark, we said that when it comes to retirement we don't want to have to learn from our mistakes. So can we learn from other people's mistakes? I guess that's the question.
Mark Biller:
Oh, definitely. And really that should be the goal for all of us — avoid making the mistakes and learn from other people.
So two years ago, investment firm Natixis surveyed 2,700 financial professionals across the globe, and they were asking about the most prevalent mistakes that they've observed regarding retirement planning. So this was basically the "greatest hits" of errors and oversights that financial planners see over and over. And we took that survey and detailed several of those specific mistakes in an article that we titled Avoiding the Most Common Retirement Planning Mistakes. Your listeners can check that out at soundmindinvesting.org.
Rob West:
All right, Mark. Let's dive in and run through some of these. What was at the top of the list for retirement mistakes?
Mark Biller:
Well, somewhat surprising to me, the most common retirement-planning mistake was underestimating the impact of inflation. And that surprised me just because if you think back over the last, say, 30 years, up until about the last three years or so, that was really a pretty low-inflation environment. But in spite of that, underestimating inflation was still a big problem for people in their retirement planning.
I think that's because just the same way that people don't fully appreciate the power of positive compounding in the long-term growth of their portfolio, they also don't understand the destructive impact of inflation compounding.
And when you look at that, even with a relatively tame rate of inflation, the compound effect over many years destroys a lot of purchasing power. One example that would help is: If inflation grows at just 3% a year, a lifestyle that costs $75,000 a year to support today will require $135,000 20 years from now. So that's just an enormous difference in terms of how much income a retirement portfolio needs to produce.
Rob West:
Yeah, that is really helpful. And we've had, of course, a pretty stark lesson recently in how destructive inflation can be over the last few years. All right, what's next on the list?
Mark Biller:
So the next one was investing too conservatively, and this one ties directly to that inflation-related point we were just talking about. So to meet the challenge that's posed by inflation, retirees need to keep their portfolios growing so that the portfolio at least matches that rate of inflation.
While fixed-income instruments like CDs, savings accounts, bonds — the things that tend to be really popular with retirees — they definitely have a place within somebody's overall financial picture, but those types of investments aren't likely to outpace inflation. And that's why investing too conservatively can actually be pretty risky.
It's also why, Rob, you and I are always talking about on these programs together that retirees need to be careful about scaling down their stock exposure too quickly.
Rob West:
We're going to head to the phones here in just a moment. We're taking your questions specifically on investing-related topics and retirement planning for this portion of the broadcast, while Mark is with us: 800-525-7000.
Mark, you mentioned underestimating the impact of inflation, which, as you pointed out, was somewhat surprising just because inflation has reared its head in the last couple of years. But for the three decades before that, it's been pretty tame, and yet it can erode purchasing power and really hurt us in this retirement season.
Let's dive into the next one. What's up after this?
Mark Biller:
Overestimating investment income. So, on the one hand, people tend to underestimate how much income they're going to need due to inflation, and then, on the other hand, they tend to overestimate how much investment income they're actually going to be able to get from their investments.
So a good rule of thumb that we like to use is that as you try to put together a realistic retirement plan, you want to be optimistic about how long you're likely to live, but you want to try to be conservative about your projected returns.
And directly related to that, if you're withdrawing too much money too soon from your retirement accounts, that can create big problems later, especially if you are — or your spouse is — fortunate enough to live to a ripe old age.
So the general rule of thumb that you hear in the financial planning community has always been that withdrawing no more than 4% annually from your portfolio is likely going to keep your account from being depleted too soon. But that 4% rule, you just need to understand that that's a rough rule of thumb. It's not always optimal for every person in every case.
And your own personal safe withdrawal rate is going to depend on a number of different factors, which are going to include any other sources of income you have the size of your portfolio, the sequence in which your investing returns occur — so if you have a big drawdown right after you retire, you're probably going to have to make some adjustments there. There are a lot of details that can influence that 4% per year starting rule of thumb.
Rob West:
Yeah, that's really helpful. And the next mistake, Mark, tells us why it's important not to overestimate retirement income. Take us into that.
Mark Biller:
Yeah, this one shocks a lot of people, Rob, and it's underestimating your lifespan. The reason that it's shocking to a lot of people is we all have heard, over and over and over again. statistics like "the average life expectancy in the U.S. is 76 years." So that kind of gets fixed in our head as like that's the goalpost 76 years.
But we noted in a recent article that if you're a man in good health and you make it to age 65, you have greater than a 60% probability of living to age 85. And a 65-year-old woman in good health has better than a 50/50 chance of living into her 90s. So that's very different than that 76-year overall population average.
What that means to us as retirement planners is most people have got a plan on at least two decades of retirement if they make it to age 65 in good health.
Now, there's no way to know exactly how those years are going to play out in terms of what the investment performance is going to be like, or what the rate of inflation is going to be like. But if we fail to plan for an appropriately long — and like we said we're talking at least 20 years — an appropriately long retirement, then we're not considering the full range of possibilities, and that's asking for trouble.
Rob West:
Yeah, that's really helpful, Mark, which allows us, even at age 70 to still take a long-term perspective when it comes to our investing — which can help us get comfortable with the fact that we still need an allocation to stocks even in that season of life. This is really good stuff.
Let's begin to take some questions here today. We'll work these in as we go. Questions for Mark Biller on investing or retirement planning at 800 -525-7000.
Let's go to Mississippi. Hi, Brad. Thanks for calling sir. Go ahead.
Caller:
Hello. I was calling because my wife and I have a lot of different investments, and we're looking to add gold as an investment. And I see a lot of companies out there, and I'm not sure which one is a good one. I'm a member of Costco, and I see they also are selling the gold American Eagle coin. Is that a good investment?
Rob West:
Yeah. Interesting. I've been reading some stories about Costco. They're also selling one-ounce gold bars, and, apparently, they're even having trouble keeping them in stock just because people are buying them up. But, Mark, your thoughts on where someone should go to buy physical gold.
Mark Biller:
Yeah, actually I love the Costco option if you can find it. Like you said, Rob, a lot of times they actually sell out. I think I read recently that Costco sold more gold than the U.S. Mint last year. So they've gotten into this in a big, big way.
But Brad, the reason that I like Costco is because when you're buying physical gold, you really can reduce it to a very simple formula — as long as you're buying from a trustworthy source where you actually can trust that you're getting gold and not something counterfeit. But the simple formula is just, "What is the gold price, and what is the premium over that spot gold price that you're paying?"
And so the gold price is readily available. You can get it every day online at a number of different websites. And the reason I like Costco is because as with so many things that they sell, they charge a very low premium. There's a very low markup over the spot price of gold. So I think that's a great choice.
If you want to buy physical gold, you want to try to minimize that premium that you're paying — and that's really where you can kind of quickly eliminate a lot of the things that you see advertised. If you go and you actually look, "What am I paying per ounce for this gold?" you'll see that the variance is wide. There's some places [that] charge big markups, other places, small markups, and you want to avoid paying a big premium for really what is a commodity. An ounce of gold here is an ounce of gold there, so why overpay for it? Costco's a great choice.
Rob West:
Yeah, very good. We appreciate the call, Brad.
I know you can actually buy those online. You do have to be a member of Costco and they will limit you, I believe it's to five units.But at the current price of gold, five ounces, Mark, is going to run you ,what? $12,000, right, something like that?
Mark Biller:
Yeah, exactly.
Rob West:
Let's head back to the phones. We'll go to Ohio. David, thank you for your call, sir. Go ahead.
Caller:
Yeah, I have some dogs in my... (no audio)
Rob West:
We had you there for a moment and lost you. Let's try one more time and see if we can get a clear signal. Go ahead. (no audio)
All right. We'll put you on hold and see if our team can work with you to get back with us. Let's go to Missouri. Hi, Guy, how can we help you?
Caller:
Yes, a hypothetical question. Let's say someone has done well in they're investing and they've got a $1 million portfolio, and say they've earned like a 10% return most of those years. And they'll say the stock market takes a downturn — 30% — so the person loses $300,000 overnight. How long does it take to make that money back, let's say at a 7% return?
Rob West:
Yeah, Mark, you got your invested calculator handy, buddy?
Mark Biller:
Ha! I don't, but just off the top of my head, if you start with $700,000, you make 7% a year — I think the easiest way to think of that is in percentages. And what you're driving at, Guy, is we often at SMI have referred to the "cruel math" of investing, which is simply that when you lose money as an investor, you need a larger percentage gain to make back than the percent that you lost.
And there are easy ways to illustrate that. If you lose 20%, so you go from $1 million to $800,000, you need a 25% gain to get back even to $1 million.
So with your example, Guy, I am going to say it's going to take you probably, what? Five years to get that back? And that's probably not atypical from a big bear market.
You can check my math on that, Rob.
But when you have a big bear market — usually, thankfully, it doesn't happen overnight but over a span of a year or two — a 30% drawdown isn't that uncommon. And it usually does take at least a couple years, a few years, to earn that back.
Now, usually, coming out of a bear market, unless a person drastically changes their asset allocation to something more conservative or puts a lot of that money in cash during the bear market because they kind of get scared out of the market, usually the rebound out of a bear market tends to happen a little quicker than that.
Now, of course, you can't generalize that too much, but a lot of times, you have a sharp downturn, you tend to have a sharp rebound. And that's why investment planners and professionals usually will tell you, you don't want to make big adjustments to your asset allocation in the middle of a big drawdown, a big bear market, because you'll miss that eventual rebound.
But, Guy, hopefully that helps you. Did you have a follow-up on that or just wondering about that math problem?
Caller:
I guess the follow-up would be is, say they made it back up in five years and then we had another downturn, so we lose again. I'm not trying to be negative. I'm just trying to be realistic.
Mark Biller:
Yeah, well, and that is why you want to not just be thinking about as an investor, "What's the biggest number that I can get to?" You want to always attach those numbers in your investing, your portfolio, your retirement planning, to "What do I need? What are my goals, what's my timeframe to retirement, what are my budgetary spending needs in retirement" — so that I'm not taking on more risk than I need to and putting myself at risk of these market drawdowns.
Because there is one sure thing as an investor: You are going to have both bull markets and bear markets. Bear markets are just part of the deal. So you don't want to overexpose yourself to risk if you've gotten your portfolio to a point where you can comfortably meet your spending needs, then we always — we frequently talk on these programs about things like "financial finish lines," making sure that you don't cross your financial finish line twice — once going forward, and then a second time going backward in a bear market.
So a lot to think about there, Guy, but that's why we take this holistic retirement-planning approach of "What do I actually need?" Because the goal isn't to just get the biggest number out there, it's to meet actual, specific family spending needs that you have.
Rob, your thoughts on any of that?
Rob West:
That's very well said, Mark. And you nailed that number. You're just shy of a million dollars at 7% over five years when you're starting is 700,000.
But I think to his point, Guy, we don't want to make a mistake and get too aggressive trying to make up for what we lost. And, as Mark said, the goal is to begin to transfer as we get close to that retirement season from a goal of capital appreciation to capital preservation.
We still maintain a stock allocation — to our earlier point about people living longer and that's the way we offset inflation. But remember over the last 50 years, the last 100 years, whatever time period you look at —as long as it's more than a couple of decades — the data says you will do well over time. If you're properly diversified, you're a steady plodder, you have the appropriate mix of investments for your age and risk tolerance. This is the very best place to build wealth — in a stock and bond portfolio, apart from real estate and being a business owner.
And so, this is the way to go — and as we maintain that long-term perspective, it allows us to stay focused on our ultimate objective and weather those storms that will come. But just be patient. Don't try to pick your entry and exit points.
Hey, we appreciate your call today. Thanks for being on the program.
A quick break, David, coming your way after the break. We know we've got several other lines holding. We'll be taking your questions right around the corner with Mark Biller. We'll be right back.
Rob West:
Delighted to have you with us today on Faith & Finance here on American Family Radio. Mark Biller with me today. We're talking about common retirement-planning mistakes.
What are those top mistakes that 2,700 financial advisors said most people make? Well, let me give you four of them. Just to recap. Number one, underestimating the impact of inflation. Number two, investing too conservatively. Thirdly, overestimating investment income. And fourth, underestimating your lifespan. We'll give you number five here in just a moment.
Let's head back to the phones. David in Ohio, I think we have you now. Go ahead, sir.
Caller:
I have some stocks in my portfolio that are real dogs. I've lost money on 'em. I don't expect them to come back. Some of them are EV [electric vehicle] stocks. Would I be wise just to take the loss, sell those off and look for something with better growth?
Rob West:
Yeah. Mark, your thoughts?
Mark Biller:
[One of the toughest things for] investors is to sell investments that haven't turned out the way that they want. And a lot of people will make the mistake of looking at their cost basis — "What did I pay for it?" And if they're down in that investment, it's a real emotional, psychological hurdle to sell at a loss. People naturally want to wait for it to at least get back to even. And, in a lot of cases, that either doesn't happen or it takes a really long time.
So I think the best rule of thumb that I can give you on this is, "If you were objectively making a decision today of whether to buy that stock, would you buy it today?" If you wouldn't buy it today, then that's a pretty strong indication that it's probably time to go ahead and sell it and move that money into something that you would buy today that you think has a better chance of going up from this moment going forward.
And that's a really difficult thing for people sometimes to face because it naturally kind of means, "Well, I made a mistake on that one." But even the very best investors — the people, the Warren Buffets and all the other famous names — if they're right on about 55 to 60% of their investment decisions, that's pretty good for this industry. And that means being wrong a lot.
So the quicker we can come to terms with "I'm going to be wrong sometimes on my investment decisions" — and, frankly, that's okay that's just part of it — and quickly recognize those mistakes and cut 'em out of our portfolio, the better we're going to do over the long term.
We like to say at SMI, "We want to sell our losers and hold our winners," and most people tend to do the opposite. They chip away when something starts to do well and sell the lock in those gains and they hold those losers forever. And really that's — counterintuitively maybe — but that's the exact opposite of what you want to do.
So I would say sell the dogs, move it to something that you feel like has a better chance from today moving forward, and I think your performance will improve.
Rob, any other thoughts?
Rob West:
No, I think you're spot on. I remember my dad — as an old dividend stock picker — he would say something similar to you and your team, Mark. He would say, "Cut your losses and let your profits run." And I think that's this idea here.
There's also some tax benefits to that. If this is in a taxable account, you could lock in that loss, which could offset future gains, and then move that money to something else. And so that can be beneficial to you as well.
David, any follow-up thoughts on that?
Caller:
No, that gives them some clarity. I think I'm going to take an objective look at these. And yeah, they're in a taxable account so I will tally that up. And I think some of these electric vehicle stocks that I have, they're never going to come back, I don't think. I think that's great advice and I think I'm going to follow it.
Rob West:
All right, very good. David, thanks for calling today. We appreciate your patience.
Mark, there's one more common retirement planning mistake that we haven't covered yet. What is that last one?
Mark Biller:
Well, it's forgetting to account for healthcare costs. In the U.S., Medicare covers a lot of our health expenses once we turn 65, but it doesn't cover everything. Typically, it's going to cover routine medical costs [and] short-term hospital stays, but then covering other expenses with insurance is going to require us purchasing either a Medigap supplemental plan or a Medicare Advantage plan. Even with those, a person is going to face some out-of-pocket expenses for copays and other things that [many] plans just don't cover, like dental care.
And, of course, we also need to touch within this area, the biggest health-related wild card and retirement planning, which is the cost of extended care. Long-term care insurance has gotten so prohibitively expensive for a lot of people, but there are some more affordable short-term care policies that could be an option.
One of the things we mentioned in the article, Rob, is we love health savings accounts, and if a person is eligible for a health savings account, we strongly recommend trying to build up an HSA balance while you're working to help cover some of these later-life health costs.
And, of course, to kind of put a bow on this one, even if you don't have an HSA account, one of the best ways to prepare for later-life health costs is to take good care of yourself today. That's where all the familiar advice about diet, exercise, sleep, managing stress, [and] all those other controllable factors can really pay off down the line.
Rob West:
Well, money was personal enough and now you're getting into our diet and our exercise there, Mark. (laughter) It's a great point though. Living a healthy lifestyle today is really another form of investing that will pay big dividends down the road.
Mark, circling back to long-term care insurance, I mean, are you to the point with your team there at SMI where you're saying, for the average person, it's just gotten out of reach or is it still something worth looking into?
Mark Biller:
I think it's worth looking into Rob. But, unfortunately, most of the time for the average person, I do think they'll probably find that it is getting out of reach.
Now, we've written before at SMI about some newer policies that focus more on short-term stays, and they would cover 180-day to maybe three years' stay in a nursing home, and those may be a little more affordable. A lot of people think, "Well, but that wouldn't really cover me if I had something big." And that's true, but when you look at the statistics, a lot of the stays in nursing homes and care facilities do tend to be shorter term following surgeries, those sorts of things.
So it's an option that a lot of people don't know exists and it is newer in this ballpark, because those long-term cover everything for as long as you need. Those policies have just gotten so expensive for people.
Rob West:
Well, to your point about a short-term stay policy, I saw a study recently — it was from 2023 — it said the average length of stay in long-term care is just over three years. Only about 20% of residents require care for five years or longer. So perhaps that's another way to go, which could right-size it for your budget.
Mark, tie a bow on this. We're going to have to let you go here, but just being well-planned is key, right?
Mark Biller:
Oh, absolutely. And you're going to get a big payoff from putting the time in to try to get a good retirement plan in place and to keep up with that. It's not a one-time thing that you do. Retirement planning is something really ideally you go back to and keep updating as you go.
Rob West:
He's Mark Biller. The article is called The Most Common Retirement Planning Mistakes. You'll find it right now: soundmindinvesting.org.
Mark, great to have you with us! We'll be right back.