The 3 Biggest Financial Mistakes I See

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Sep 12, 2020


By Lee Sherbakoff, CPA/PFS, CFP®, RICP®

As a financial advisor, one of my responsibilities is to help prevent my clients from making financial mistakes that could derail their retirement plans. Every client’s situation is unique, but having worked in this industry for many years, I’ve come to see three common mistakes most pre- and post-retirees make. 

I want to share these common mistakes with you today, so you can protect your wealth and live the life you want in retirement.

Mistake 1: Not Planning For Unexpected Risks

There are all types of unexpected risks in retirement. Here are five types most people forget to plan for: 

  1. Inflation. Inflation reduces your purchasing power. If you have $5,000 in today’s dollars, you’ll need $8,200 in 20 years or $10,500 in 30 years to buy the same goods, based on an average 2.5% inflation rate. (1)
  2. Sequence of returns risk/market risks. When the beginning of your retirement aligns with a bear market, you’re at risk for sequence of returns. You have to sell more shares to get the same amount of income, so these negative returns deplete your portfolio more quickly. 
  3. Forced early retirement. Over 50% of people retire earlier than expected due to illness, disability, or to care for a spouse. (2) This leads to decreased Social Security benefits, decreased savings, and a longer retirement.
  4. Healthcare costs. Healthcare will be one of your largest expenses in retirement, yet some people forget to plan for it. It’s estimated that the average couple will need $295,000 in today’s dollars for medical expenses in retirement, excluding long-term care. (3)
  5. Long-term care costs. Almost 70% of individuals who are 65 today will need long-term care at some point in retirement. (4) And contrary to popular belief, Medicare doesn’t cover assisted living, home health aides, or nursing homes. 

Some of these risks are inevitable—such as inflation and stock market volatility. Others aren’t guaranteed but are likely to happen—such as long-term care and healthcare costs. 

Make sure your financial plan accounts for these hidden risks so they don’t unexpectedly eat up most of your savings in retirement.

Mistake 2: Not Creating An Appropriate Withdrawal Strategy

There’s an old rule of thumb that says you won’t outlive your money if you withdraw 4% a year. But this is a generalized rule that doesn’t account for all the unexpected things that could happen in retirement. 

For example, let’s say you need to pull $5,000 from investments each month to cover your income gap in retirement. If the market drops by 20% right as you’re about to withdraw, you’ll need to sell a lot more shares to get that $5,000. This is called dollar-cost deaccumulation. It’s the opposite of dollar-cost averaging while you are accumulating over your working years, and it can quickly erode your portfolio.

Failing to create an appropriate withdrawal strategy can cost you thousands of dollars in retirement. It can also be the difference between enjoying the fruits of your wealth and running out of money before it’s time. 

There are countless withdrawal strategies out there. Some include building up cash reserves to use during down markets. Others include having a dynamic withdrawal strategy that adjusts as your expenses change in retirement. 

The best strategy for you depends on your unique goals and needs. Connect with a financial advisor who can help you create the perfect one for your situation.  

Mistake 3: Not Having A Legacy Plan

Legacy planning isn’t just about money. It’s about ensuring your spouse and family are well taken care of should you die before them. It’s about planning ahead for everything you’ll leave behind.     

Without a proper legacy plan in place, your estate could pass through probate—an often stressful and costly process that takes months or years to conclude. Save your family the frustration and worry by creating a clearly defined legacy plan beforehand.

Legacy planning is quite complicated, but generally speaking, it includes these steps: 

Step 1: Decide who you want to leave your assets to, including family members, friends, and any charities or organizations you want to support.

Step 2: Think about any preferences you have regarding medical care. Name a healthcare proxy. Create a will. Take the burden off your family by clearly listing out your wishes and needs.

Step 3: This step is optional, but consider your personal legacy and the values you want to leave behind. Create video diaries for your loved ones. Write a handwritten letter to your children and grandchildren. Document any family history and traditions you want passed down to future generations.   

Step 4: Work with a financial professional to fine-tune your plan and figure out the most efficient and tax-advantaged ways to pass on your legacy. 

How We Help You Avoid These Mistakes

Planning for a safe and secure retirement can be complicated. Your situation is unique, and there’s no one-size-fits-all strategy for avoiding these common mistakes. The best thing you can do is seek help from a trusted financial advisor. 

At the Nalls Sherbakoff Group, we’re passionate about helping you thrive in retirement. If you’d like to learn more about how you can avoid these common mistakes, set up a complimentary appointment with our team by calling us at (865) 691-0898 or contacting us online. We also have a free webinar on What We Do & How We Help if you’d like to learn more about our services. 

About Lee

Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), and Retirement Income Certified Professional (RICP®) credentials. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). When he’s not loyally serving his clients, Lee enjoys giving back to the community and to his profession, acting as a council member of the Tennessee Society of CPAs and a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.

DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.

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(1) https://smartasset.com/investing/inflation-calculator#zClpXOmRvb

(2) https://www.investopedia.com/terms/f/forced-retirement.asp

(3) https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

(4) https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html#:~:text=Someone%20turning%20age%2065%20today,of%20long%2Dterm%20care%20services&text=For%20purposes%20of%20Medicaid%20eligibility,received%20in%20a%20nursing%20facility.