There Are Consequences

I was the guest speaker at an event for a ladies group and, as I always do, I took time for questions at the end.   One of the participants we will call Abby, bravely shared her story with the group.  She was in her mid-60s, had divorced many years ago, and raised her children as a single parent.   Abby told us that as soon as her pension plan allowed, she decided to take her reduced monthly pension and retire even though her kids weren’t done school.  She still wanted to help them, so she had used the little savings that she had to help them with tuition figuring she had her pension and it would be enough.   Kids schooling ended up costing more, her condo needed some updates and pretty soon she found herself in her current financial state:   Maxed out on her home equity line of credit and can’t afford to make the payments, with no savings and living on a truly fixed income.  Abby’s question to me was: “What would you suggest I do”.

What Abby really wanted me to do was wave a magic wand.  She knew she was in trouble and truly hoped that I had a rabbit I could pull out of a hat that would magically solve all her financial problems.  Unfortunately for her, I am not a fairy godmother and money doesn’t fall from the sky.  It is fair to say that even though I answered her as gently as I could, I told her exactly what she did not want to hear.  In fact, it was obvious that Abby didn’t like what I told her, but sometimes the truth is hard.    There are only three options that someone in Abby’s situation has:  going back to work, selling her condo and finding an affordable housing option, and / or cutting expenses. Depending on the exact circumstances she is in (like how much debt does maxed out mean, what her income and expenses actually are, and what her exact net worth is), it may take a combination of the options for Abby to financially find a path forward and none of them are easy.

Unfortunately, it was quite apparent that Abby retired without a plan, and failing to plan had consequences.   While she can’t change what has happened, she is in control of her decisions going forward as difficult as those may be.   While Abby is in control of her future choices, so too are the other people who were at the event and those who are reading today.  In fact, we all have an opportunity to learn from Abby having shared her story.  Before anyone makes the decision to retire, the best thing you can do is have a retirement plan prepared.

Firstly, this plan should be based on you – what are those relationships, those interests, and those goals that bring you joy? What is it that you need your finances to support during this next phase of life?  Be honest with what this may cost, what your expenses will be.   Too often people think they can make it work on a greatly reduced income because they really just want to retire, only to find themselves in Abby’s shoes.  A plan should use reasonable assumptions for things like rates of return (how much you can reasonably expect your investments to return each year), inflation (the average rate at which the cost of living goes up by each year), and life expectancy (plan for a long life).   A plan should then have scenarios run based on the question:  “What are the circumstances that might impact your financial future?”.   If life throws you a curveball and you are already retired, you want to make sure you will still be ok.  Very likely, besides not having a plan, Abby hadn’t considered issues like how to help her children with their education, or how she might cover unexpected expenses.

While it was apparent that Abby was suffering from the consequences of not planning, it is also fair to say that Abby missed or overlooked the warning signs that she was headed for trouble.   Some of her warning signs:

  • Her savings fell in value quickly. When you have a plan, typically you can compare where you are versus where you planned to be.   When your savings fall below a critical value, you know you have a problem.
  • Her expenses were consistently higher than her income. It wasn’t a one-time imbalance.  Taking early intervention, finding ways to cut back on expenses early can preserve your savings.
  • Dipping into credit with no ability to pay it back. Sometimes life happens, and with interest rates so low, lines of credit can be valuable tools.   But if you can’t pay it back, you have a problem that needs to be dealt with – the sooner, the better.

Planning for retirement is complex but you don’t have to do it alone.   Working with a knowledgeable advisor who puts planning at the forefront of practice will go along way to helping you have confidence in your ability to retire comfortably and remain that way.

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