As a financial advisor in San Antonio, I see people generally fall in one of two groups when it comes to financial planning and preparing for retirement.
There’s one group of people who find financial planning intimidating, complex and overwhelming. Thankfully, many of these people turn to a professional for help. Because retirement is complicated. And our financial lives are not the same.
Then there’s another group of people who think it’s simple, assuming that everything will work out in the end. I worry about these people, because assumptions can be extremely dangerous, especially when it comes to financial planning and preparing for the future.
When you’re a small business owner, these assumptions can be make-or-break. (Check out our new financial planning guide for business owners here.)
So many assumptions can lead you down the wrong path, particularly about retirement. A crucial part of good retirement planning is making sure that your expectations are both sound and flexible.
Here are 8 financial planning assumptions you shouldn’t be making.
1. You Will be Able to Sell Your Business and Live on the Proceeds When You Retire
This first assumption is so common. And so dangerous.
“When the time comes to retire, I’ll simply sell my business and live off the proceeds.”
This statement actually contains two wrong assumptions. First, it’s fine to plan to sell your business. But don’t overly rely on it.
Businesses are not liquid. Selling a business depends on many factors outside of your control: The relative health of the economy, the strength of the sector, the attractiveness of the business to buyers and more. What if you want to retire two years from now and the business doesn’t sell or takes several years to find a buyer?
Second, just as businesses aren’t liquid, they don’t have a fixed price. The valuation of your business also depends on many factors outside of your control. The price can fluctuate, just as the price of houses do. Your proceeds could be far under what you anticipate (or far over, for that matter).
You may plan to realize $1 million only to realize when you actually go to sell the business that it’s only worth $500,000.
If you’re running a successful business, it may be easy to assume you will sell it one day for a good price and use that money to live off in retirement. But anything can happen. Just look at how COVID-19 has changed life in so many ways. Even successful businesses have filed bankruptcy, and reports show that 9,300 U.S. stores closed in 2019, and more than 5,800 closed the year prior.
Talk to a financial advisor. Discuss different scenarios and situations (high price, low price, medium price) and create a back-up plan.
2. You’ll be Able to Work Forever
While it’s become increasingly common to work in retirement, don’t plan to work forever.
The sad fact is, ageism in the workplace is real. Many people get laid-off or downsized in their 50s and later. Even if you look for another job, you may not be able to find one – or find one at a comparable wage.
Secondly, you may encounter health problems that make it impossible to work, or work as much as you once did. The average lifespan now extends well into the 70s and 80s. If your work depends on vision, hearing or mobility, your ability to continue a job may eventually be impacted as you age.
3. Medicare will Cover Your Medical Needs
The idea that Medicare covers all medical needs for retirees is very common. But it’s not the truth. Medicare doesn’t cover vision, hearing or dental, for example, and these are services many senior citizens need. Basic Medicare (Parts A and B) doesn’t even cover prescription medication, although retirees can purchase prescription coverage through the Medicare system.
In addition, Medicare is not free (another common misconception). You will need to pay for premiums, deductibles and out-of-pocket costs. Many senior citizens purchase Medigap or Advantage plans to help with costs.
Be sure to include the cost of healthcare as well as any likely healthcare needs in retirement in your financial projections. For help getting started, contact the PAX Financial team.
4. Your Expenses Will be Lower in Retirement
Expecting your expenses to decrease in retirement is another very common assumption. In reality, many people find their expenses actually stay the same or increase (think travel plans or relocation costs). Everyday expenses are actually one of the more common ways retirees are surprised by retirement. If you plan to travel or move to an expensive area, for example, you may end up spending more.
The key to reliable expense projections in retirement is to assess your likely actual expenses. Will you travel extensively, for example? Start a business? Project those expenses into the future.
Make sure your plans for the future also include inflation. Inflation runs about 2 to 3 percent per year, and for some expenses, such as healthcare, it’s more than double that.
5. You Won’t Need Long-Term-Care Insurance
Many people don’t consider their need for long-term-care insurance at all, for several reasons. First, many folks want to age in place. Second, the idea of not being able to care for ourselves can be daunting, and many people simply don’t want to think about it.
But given the rise in longevity, it’s at least possible that you may need long-term care at some point. Plus, Medicare does not cover this. Medicaid may, but it only kicks in once your assets are very low.
Discuss long-term-care insurance with a financial advisor.
6. You Won’t Make Emotional Investing Decisions; You’ll Remain Objective
It can be tough to avoid emotional investing. Even if you’re objective and disciplined by nature, it can be harder to maintain a calm demeaner once you’re retired. Losses in your retirement funds affect you much more directly when you’re living off of your investments.
At PAX Financial Group, we have clients come to us after they’ve made an emotional decision that they’re not sure how to fix. It happens. We’ve created an entire guide on Behavioral Finance to help investors understand their feelings about money and therefore, their spending and saving tendencies. Please check it out.
It can be prudent to talk to a financial advisor who understands the market and your investments.
7. Your Business/Assets Will Automatically Go to Your Business Partners, Family Members or Loved Ones if You Pass Away
No one wants to think about dying. As a result, people often put off drawing up wills and business plans that ensure their personal and business assets go to the people they want to receive them.
Additionally, people may have a vague sense that it will all be taken care of without their doing so. “Isn’t it obvious that my business should go to Partners A and B and my home to my oldest child?” Sadly, no.
The disposition of your assets isn’t obvious to anyone but you. If you die intestate (without a will), a court will decide who receives your assets during what’s often a very lengthy probate process. If you don’t leave a business plan after your death, no one may know your plans. If someone is aware of your wishes, he or she may not be legally bound to carry them out.
Don’t put off your estate planning! Taking care of your financial life can be an added stress to your grieving friends, family and business partners.
8. Life Will Go as Planned
All of these tips bring us to the moral of the story: Life doesn’t necessarily go as planned. If nothing else, the year 2020 and its dominant feature – the COVID-19 pandemic – has taught us all this fact.
Talk to a financial advisor. Don’t just assume. Work together to create a plan – and have a Plan B to go with your Plan A.
If you’re looking for a financial advisor in San Antonio or are ready to make a change, schedule a no-obligation conversation with the team at PAX Financial Group. We’re here to help!
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
