Avoid Making These 5 Retirement Mistakes - Replay

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast, it's always easier to do nothing, especially when it comes to changing something that has been routine for years. We are creatures of habit and inherently try to avoid doing things that are uncomfortable, which can make retirement planning a somewhat of an uncomfortable process. It can be uncomfortable because there is this propensity to want to keep everything the same while having your retirement needs met. Unfortunately, this just isn't how this works. The need for income signals a need for a metamorphosis from long term growth to income now.

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Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion and the whole teaching there is about preparedness and being ready. There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonia. Thanks for tuning in and let's get into today's topic. When I was getting started with my business back in 1993, a very successful person said to me, the more money you have, the bigger the mistakes. And at the time I didn't completely understand what he meant. But as I began making more and more money, it finally registered. I grew up in a blue collar family and was raised to work hard, take responsibility for myself, and I've always been driven. It's just part of my DNA. And when you couple a strong worth ethic with a desire for nice things, you quickly find yourself stuck. I was 21 years old when I began my business and within a few short years I was making more money than anyone I knew growing up. By all societal standards, I was successful and had all the boxes checked of what many people would perceive as success. I had nice vehicles, a nice home, a model family. I was seen as a good, reputable business owner who was involved in the community and I always knew that if I worked hard things would be good, but that was the problem. I had to keep working hard to maintain what I had. Being in finance, I really only had examples of how to work hard and make money. But what I eventually figured out on my own was that making a lot of money was not the same as having financial freedom. I came to realize that what I was doing was unsustainable long term and instead needed to create income producing systems that would support my lifestyle. That was a pivot point in my life when I realized that I needed to create multiple streams of passive income and so that's what I created for my family. The experience I had is like so many people who work to earn a paycheck while accumulating money in retirement accounts and then finding themselves wanting to retire, they're stuck in the same way as I was stuck trying to figure out how to maintain a lifestyle without having to work to earn a paycheck. Over the last 30 years, I've worked with thousands of people teaching similar strategies and have discovered common mistakes that you can work to avoid when possible Mistake number one is having this distorted view of what wealth is I've come to the opinion that the status quo paradigm about wealth is distorted. The idea of having a high salary or a large investment account as being wealthy is missing the mark. They're both key aspects to building wealth, of course, but in my experience, wealth is only sustainable when there is passive income. Otherwise the wealth is limited to your ability to replenish what is consumed. It's kind of like this. A freshwater spring is more valuable in my opinion, than a stagnant pond because the spring has the potential to provide fresh water for generations, right? While a stagnant pond must be replenished or it's going to go dry. The second mistake is having all your eggs in one basket. We have all heard it said, don't have all your eggs in one basket. Despite the prevailing wisdom though, I find that many people carry around a single basket full of eggs. In my view, there is a misunderstanding of what diversification really means, and despite their best effort, people often fail to obtain more than a single basket. For instance, having $250,000 in 10 different banks is a diversification of banks, but it's not a diversification of assets. Or having a 401k and an IRA isn't diversification of assets if they both hold the same investments. Having a dozen different mutual funds representing different sectors and markets is diversification of a portfolio, but it's not necessarily a diversification of assets. I find that people often use a narrow view of diversification, limiting their thinking to a single asset type, such as the example of depositing money in several banks. This is what I call vertical diversification, where you go deep into a single asset type but fail to go horizontal to further diversify outside of the banks. A bank account and a portfolio of mutual funds would be an example of horizontal diversification. In its simplest form. There are two different asset types represented and within each type you have vertical diversification. Investments have horizontal types of assets such as public markets, private markets, and entrepreneurial opportunities that offer vertical diversification. Within each type, there are many factors to consider when attempting to diversify, but don't make the mistake in thinking that a bank account and a portfolio of public investments is all that is available to you. There is more to uncover about how to move your diversification. Horizontal mistake number three is having your money all tax deferred. Many people defer tax liabilities within their retirement accounts. The problem that soon follows though is the reality that taxes are due when you want to use the money. Of course, there are times when deferring tax liabilities could be a prudent tax strategy, but those are isolated scenarios and the motivation is often misinterpreted as tax savings. Tax deferral is a deferral of tax liabilities, and it's not necessarily a tax savings. There's a lot to formulating a tax plan and it can vary greatly from one person to the next, but a common practice to avoid is is making an investment decision based on the tax deduction alone. Choosing to fund a retirement account over an after tax account solely for the deduction, or a business owner spending money to avoid being taxed are examples of the tail wagging the dog. When making decisions regarding how you save money, consider how you will ultimately use the money. Most people would prefer tax free access to cash when ready to use their money. If you're already overweighted in tax deferred assets, a Roth conversion can make sense, but it is best to work with an experienced team of professionals to assist you with finding available tax credits or other potential methods that could help you offset the tax liabilities that are generated from the conversion. If structured properly, this approach can provide a tax free income in retirement. The fourth mistake is having too much dependency on markets. Hope is not a strategy, and when it comes to retirement, there's often a hope mentality, believing that when there are losses, the markets will recover. We have seen Markets move in extreme ways, sometimes good, sometimes bad. But it takes time for a market to recover. And when it comes to retirement income, time is simply not something you have when using market sensitive investments to supplement retirement income. A loss in value can rapidly accelerate the depletion of an account when compounded with the withdrawals. As your account value drops, the percentage of your withdrawal increases. Take an example of a million dollars with a 4% annual withdrawal rate. The hope is that the account will earn more than the 4% to cover the withdrawal. But in a year when you may experience a loss of, let's say, 20%, that 4% withdrawal is now a 5% withdrawal. And when you combine it with the 20% market loss, it equates to a 25% reduction in the value of your account. So to recover the $250,000 that was lost and absorb the next year's $40,000 withdrawal, the market must gain 38% to get back to the original $1 million. Of course, it's possible to have a large gain following a year of significant losses, but you have to consider the possibility of a flat year or potentially further losses. Now, I won't carry the math forward, but suffice it to say that it's unlikely to be a happy ending when it comes to retirement income planning. Consistency is the primary attribute, and having too much dependency on markets leaves you overexposed to sequence of return risk. Mistake number five is having complacency. It's always easier to do nothing, especially when it comes to changing something that has been routine for years. We are creatures of habit and inherently try to avoid doing things that are uncomfortable, which can make retirement planning a somewhat of an uncomfortable process. It can be uncomfortable because there is this propensity to want to keep everything the same while having your retirement needs met. Unfortunately, this just isn't how this works. The need for income signals a need for a metamorphosis from long term growth to income. Now, what I'm covering here is not intended to be an exhaustive list of potential mistakes, but it does highlight the most frequent issues I encounter when speaking with clients. Retirement is a balancing act between growing money for the future while drawing income for your retirement needs, and there's no surefire way of accomplishing this. But there are best practices you can follow to help avoid the most common mistakes. To learn more about how to prepare for retirement, you can access a retirement checklist by visiting my website, Brian Scribonia.com that concludes today's podcast. I am Brian Scribonia thank you for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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