What are the worst money mistakes a person can make? If we thought about it, most of us could come up with a list of several bad financial moves – investing money on a risky hunch, or buying something you don’t understand (cryptocurrency, for example), or counting on lottery winnings to fund your retirement.
But what if something many of us treat as an aspirational goal actually qualifies as one of the worst money decisions we can make? Would that change how we think about our retirement hopes and dreams?
Retirement Dreams Meet Tough Financial Realities
We’re talking here about early retirement. Millions of Americans daydream about walking away from the workplace in their 50s or younger, with enough money to enjoy a life of leisure. But the reality is far different. In fact, in this MoneyWise article we first read a few years back, well-respected Harvard economist Laurence Kotlikoff argues persuasively that retiring early is one of the worst financial decisions any of us can make.
Let’s take a look and see why Kotlikoff feels so strongly. We’ll also share a wise perspective from Rajiv Nagaich, who points out that the absolute best way to decide what your financial future will look like – including the decision on when to retire – is by using a tool called a financial dashboard. Read on for the full story. (This MoneyWise article was written by freelance contributor Chris Clark.)
Many are Retiring Early – but are Woefully Unprepared
“Retire early? As the old saying goes, that’s good work if you can get it,” Clark begins. “But as a respected economist notes, too many Americans are getting it without saving enough for it. With office life reduced to remote working and the stock market driving up 401(k) accounts, early retirement has become one of the most searched terms on the web.”
The “respected economist” is Harvard’s Laurence Kotlikoff, whose views we’ve featured before here on the Blog. As Clark relates, Kotlikoff calls early retirement “one of the worst money mistakes” you can make. But why?
Clark answers that many workers considered early retirement during the pandemic, which meant their dreams were driven by emotion, not planning. Also, the stock market has recently proven unpredictable. “But,” Clark adds, “the reasons for Kotlikoff’s skepticism go deeper.”
Most Americans Aren’t Setting Aside Enough for Retirement
When it comes to savings, we all have good intentions. However, Clark writes, “Few things expose one’s money habits like retirement planning. Aggressive, ritual savers who started early are rewarded with reliably rising account balances, supercharged by dividend reinvestments and compounding interest.”
But for most, the savings picture is far different. “The reality,” says Clark, “is that millions of Americans simply aren’t putting enough away for traditional retirements, let alone the early exits pondered by 50-somethings. Kotlikoff warns that this failure to save adequately will demand that hopeful early retirees either ‘adjust their expectations or give up the plan altogether.’”
Kotlikoff’s Verdict: “We Are Lousy Savers”
The problem is straightforward. “We are, as a group, lousy savers, making early retirement unaffordable,” Kotlikoff wrote in a guest column for CNBC in 2022. “Financially speaking, it’s generally far safer and far smarter to retire later.”
Clark does point out that Kotlikoff himself never has desired early retirement. “It should be noted that Kotlikoff ends his argument by stating he plans to ‘die in the saddle’ because he loves what he does,” Clark writes. “But those tired of corporate climbing or reporting to a manager may have different plans for their golden years. How many are truly ready for it?”
Meager Savings Meet Rising Health Care Costs
It’s not hard to find evidence of America’s retirement savings shortfall. Clark quotes a Federal Reserve survey of older savers (those between the ages of 55 and 64) who reported that the median value of the average retirement account was about $134,000. That’s nowhere near enough to fund retirement as life expectancies rise, inflation pressures remain, and health care costs increase.
“Another study published by the Center for Retirement Research at Boston College in 2022 found a significant disconnect in how would-be retirees perceive the effects of market volatility and longevity when calculating their post-work plans,” Clark writes. “The report found that many overestimate the effect of market gyrations and pay less attention to how long they’ll live and how much that longevity will affect their finances.”
We wrote about money and longevity last year here on the Blog.
Long-Term Care Costs Have “Catastrophic” Implications
As the article warns, unexpected health expenses and the cost of long-term care represent a major economic disruption that most retirees will have to face eventually. In the Boston College study, author Wenliang Hou concluded, “[L]ong-term care is also a significant risk faced by retirees, but one they often underestimate.”
He calls the risk to those who are financially unprepared “potentially catastrophic.”
Social Security is a Shaky Safety Net
At the time Clark’s article first appeared, he noted that the short-term outlook for Social Security recipients was encouraging because of the generous cost-of-living adjustment retirees had recently received. He also noted that Social Security rewards recipients who wait to start benefits, which is something many early retirees don’t want to do.
But there are storm clouds ahead. “Social Security is currently on a timer,” Clark says. “Without changes at the federal level, economists estimate the main fund that supports Social Security will run low by 2034.” While the predicted timing keeps changing, most experts agree that this could trigger a benefit reduction estimated at 22-23 percent.
Save for a Worst-Case Scenario, and Wait to Start Benefits
That’s one reason economists have warned retirees not to rely too heavily on Social Security. Instead, Clark writes, “many of them urge investors to build retirement plans that assume the program will be gone.” This is despite the fact that, even if benefits are reduced, Social Security payments will continue.
Kotlikoff and others agree that delay is the best Social Security strategy. “The main advice from Kotlikoff — as well as others when it comes to retiring or tapping Social Security benefits — is to wait,” says Clark, “and instead consider upping your savings and investments while you continue to work. The additional time will keep your investments working harder and longer, and delaying Social Security benefits means a bigger monthly payout down the road.”
This advice would seem to make the goal of early retirement even more elusive.
Expert Advice from an Objective Professional
Clark recommends that, before you get too far down the retirement path, you seek wise advice from a professional planner. “Setting yourself up for a comfortable retirement is nerve-racking — especially with consumer prices and interest rates still stubbornly high,” he writes. “One solution to help you sleep better: Find a financial adviser who can help navigate your finances, keep your retirement plans on track and make sure your assets are safeguarded.”
Here at AgingOptions and Life Point Law, we agree. But we would quickly add that the best planner is one who will work with you to prepare what Rajiv Nagaich refers to as a financial dashboard. This tool is indispensable when it comes to making informed retirement decisions in all the critical areas of spending, saving, and investing.
“A financial dashboard is the next best thing to a crystal ball that actually works,” Rajiv explains. “It allows you to run all sorts of ‘what-if’ scenarios – what if you retire early, what if inflation goes up or down, what if the market has a big adjustment, and so on. Then you can make an informed choice without the guesswork!”
If you’ll contact us, or attend one of Rajiv’s informative seminars, we’ll share more about this highly important breakthrough in retirement planning.
Rajiv Nagaich – Your Retirement Planning Coach and Guide
Rajiv Nagaich’s newest program on PBS, called Designing Your Ideal Future, is bringing Rajiv’s powerful message to Americans from coast to coast. This engaging and challenging PBS show is prompting thousands to take a fresh look at the type of planning that will help them succeed in retirement.
In this one-hour PBS special, Rajiv Nagaich takes viewers step-by-step through the principles of creating a retirement plan that truly supports the life you want to live. Instead of generic check-the-box paperwork, Rajiv reveals how to infuse your perspective — your values, goals, and priorities — into every legal document and life plan component so your plan becomes a living system for your future.
Designing Your Ideal Future includes insights from real-world planning examples and a live Q&A with Rajiv Nagaich that answers viewer questions about retirement planning, legal readiness, and family communication. It’s perfect for anyone approaching retirement, currently retired, or responsible for a loved one’s future care — and for those who want a clear, effective approach to planning that prioritizes personal choice and quality of life.
What about you?
You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then these materials are your key to retirement success.
Visit your local PBS station’s schedule to find airtimes and learn how to access companion resources — including a free Legal Readiness Quiz and tools to help build your complete LifePlanning system.
Don’t remain among the millions of Americans sleepwalking their way into a retirement they never wanted. Instead, your retirement can be the exciting and fulfilling life you’ve always hoped it would be. Start by watching, reading and sharing Rajiv’s important message.
And remember, Age On, everyone!
(originally reported at https://moneywise.com)
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