(This article previously appeared on MarketWatch.com.)
When you’ve finally arrived at the stoop of retirement, your next steps are often some of the trickiest. So much time and effort goes into reaching this milestone that what you do next is often ignored. Not intentionally, it just happens.
While the day-to-day of the next stage of your life may be unknown, what not to do is actually quite clear: Don’t invest too conservatively, don’t overspend and don’t neglect your health. Seems like common sense, but it’s not as easy as you might think. Let’s explore:
The best defense in those early years of retirement is taking time to reflect and fully understand your values and life goals.
Investing Too Conservatively
Expanding life spans are good. Who doesn’t want more time to enjoy life’s pleasures? But from a financial perspective, increased longevity can be challenging. Living for 30 to 40 years beyond a retirement date increases the possibility of outliving your savings. Despite this concern, many new retirees prioritize reducing volatility by loading up on cash and bonds while ignoring the very real possibility of living longer than they expect.
While it’s true that cash and fixed income investments are less volatile, it’s unlikely they will produce the returns possible by stocks in the current, low-interest-rate environment. To wit: In 2006, purchasing a $100,000 six-month CD would have generated annual interest of $5,240. In 2015, that same CD would have only paid $370.
And that’s where the risk of outliving your assets materializes. Without a reasonable exposure to a properly diversified equity portfolio, the long-term viability of your retirement savings is at risk. This is further compounded by inflation, which substantially reduces your buying power throughout your retirement. Don’t be fooled by our current period of low inflation — it still chips away at the ability to maintain your lifestyle over time.
Spending Too Much
Retirement is about enjoying the financial freedom to do as you please. This flexibility can quickly evaporate, however, if you become too indulgent and/or bored. I’ve seen plenty of retirees fall victim to the siren songs of consumption in their golden years. For some, it’s involved binge spending to acquire the things you’ve denied yourself during your working career. For others, it’s the costs associated with owning a second home or relocating to a new warmer state and community and “keeping up with the Joneses.”
Some people also enter retirement without a purposeful plan for their freedom. In this case, 24 hours in a day can seem like an eternity. That’s a lot of “free time” where boredom and sometimes depression can ensue. To combat this issue, it’s only natural to make yourself busy, but the undisciplined pursuit of purpose can inadvertently become expensive.
Individually or in tandem, spending patterns founded in indulgence and boredom can rapidly, and in some cases irreparably, reduce your retirement nest egg.
The best defense in those early years of retirement is taking time to reflect and fully understand your values and life goals. This, in combination with having a solid understanding of what you can responsibly afford to spend each year, will significantly help avoid making a spending mistake.
Neglecting Your Health
The older you get, the harder it is to maintain good physical health. And the harder it is to stay in shape, the more susceptible your body becomes to ailments, both physical and mental. Illness and prolonged rehabilitation can quickly dry up the joy of retirement — not to mention the joy of paying all the related medical bills.
The loss of one’s routine can significantly impact life in retirement. It’s very easy for a person’s daily exercise ritual to turn into a daily happy hour ritual. It’s 4pm somewhere, right? Without a sense of routine, it’s difficult to remain disciplined. Exercise and a healthy diet are easier to maintain inside of a routine.
An important strategy to implement during your first three years of retirement is to prioritize focusing on your health before your wealth. Your wealth decisions will mean nothing if your health prohibits you from enjoying it.
For some people, this might mean starting retirement with a hobby or alternative occupation that helps preserve your routine. Just be mindful that your new routine is in alignment with your spending plan. Participating in activities that are free (or nearly free) that also focus on your health is a great way to achieve both objectives. After all, what does a walk in the park with a friend, harvesting a garden patch or making dinner for loved ones really cost? That’s a good return on life for a small price.
If you are approaching or in the early years of retirement, joyful times are ahead but they certainly aren’t worry-free. Coming out of the gates poised to make the most of them will help ensure you get more of the former and less of the latter.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risk including loss of principal.
This article is reprinted with permission from MarketWatch.com. © 2015 Dow, Jones & Co., Inc. All Rights Reserved.