Focusing on the Wrong Factors

Fred Amrein, Amrein Financial, Wynnewood, Penn.

Too many retirees let their estimated asset allocation and return dictate their budget.

I believe you should work backward and define your retirement lifestyle into two groups of expenses: required and incidental.

This approach better defines a person’s required rate of return and better matches an appropriate risk level/asset allocation. It also defines areas where cutbacks can be made when we have market conditions like today.

Underestimating Major Expenses

James R. Miller, CFP, Woodward Financial Advisors Inc., Chapel Hill, N.C.

Automobile: Many times folks will have their cars already paid off as they start retirement and so they forget to list a car payment in their budget (since they don’t have one right now).

Then, two years into retirement they will call and ask for $30,000 to go buy a car. The problem is they didn’t factor that into their expenses. So I always remind folks that are about to begin retirement to either assume a monthly car payment indefinitely or lump sum distribution every 7 to 8 years in retirement.

Medicare: There is a misconception that Medicare is free and all your health expenses will be paid for.

Retirees need to remember to budget the monthly Medicare expense that is deducted from their Social Security benefit plus the cost of a supplemental policy for things Medicare doesn’t cover. The total cost can easily run $200 to $300/month per person in retirement.

Overlooking Gifts to Children

Steven W. Medland, CFP, TABR Capital Management, LLC, Orange, Calif.

One of the most common budgeting errors that I come across is when clients do not account for money that they give to their adult children.

This error can be corrected by approaching the budget question from both a topdown and bottom-up perspective. A bottom-up perspective encompasses adding up all the individual monthly expenses (e.g. utilities, groceries, health insurance, etc.) to get a total.

A top-down perspective encompasses taking gross monthly income, then subtracting out taxes and monthly savings to see how much you are currently living on.

As an example, I recently sat down with prospective clients and reviewed their detailed monthly budget projections. They are still working but plan to retire in the next few years.

They used a form that we provided, and when we added up all of their projected monthly expenses, they estimated that they would spend about $2,500 per month after-tax in retirement. I pointed out that they earn about $5,000 per month now (after taxes and savings are subtracted), so their $2,500 monthly estimate seemed low.

We noted that their expenses would be reduced due to the elimination of commuting costs and becoming eligible for Medicare at age 65. However, that didn’t account for the entire difference. Upon further discussion, we found that they gift money to their children throughout the year, but they weren’t accounting for this in their estimate.

Not Following the Plan

Ted Feight, CFP, Creative Financial Design, Lansing, Mich.

The top retirement budgeting mistake is writing the budget, putting in a drawer, and then not looking at it again. Then they start thinking they can do two or three things with the same dollar: if they need a new car, for example, they will pay cash.

However, if they do this they will need to lower their income, since they have less money to draw from. We correct this problem with a lot of explanations showing the effect on their future income if they do this.

Carrying Debt

William Martin, CLU, CHFC, CFP, uFinancial, a general agency of MassMutual, Camp Hill, Pa.

One of the biggest budgeting mistakes people make is not having their debt paid off at retirement. If someone has $20,000 in debt a year, it is going to take $500,000 at 4 percent to support that. The best advice is to pay down debt long before you retire.

No Replacement Funds

Charles Bennett Sachs, CFA, CFP, Evensky & Katz Wealth Management, Coral Gables, Fla.

Clients don’t seem to grasp the concept of “reserves for replacements” which is a real estate industry term for accounting for those things that will need to be periodically replaced such as roofs, air conditioners, carpeting, appliances, etc. One should make a schedule with the replacement cost and expected life to determine how much to set aside each year for each item.

Not Tracking Expenses

Joy Slabaugh, CFP, EST Financial Group, Delmar, Del.

I see retirees and near-retirees who think they know what they spend but don’t because they are not accurately tracking expenses. If you don’t know what you spend, budgeting efforts are generally worthless.

I make a variety of recommendations for tracking expenses depending on the client’s comfort level with technology.

My favorite tool is mint.com; it is free and very, very easy to track expenses.

Many retirees are not comfortable with online banking so for them, I recommend using a spreadsheet/ledger where they write down income received and expenses incurred as they happen.

Later, we categorize expenses but starting out, I just encourage them to write down the expenses. For clients who hate numbers in general, I recommend they take a large desk calendar and using a green pen, write income amounts on the days received. I recommend they take a red pen and write expenses on the days incurred.

This provides a clear visual of income in/out and works well with tactile individuals. Using a large calendar can also allow clients to tape receipts to the appropriate days.

Underestimating Health Care Costs

Rob Eddy, Prudential Financial Planning Services, Lafayette, La.

One of the most significant mistakes I see is underestimating the potential costs of health care, including but not limited to long-term care. Even after the various insurance and government provided health care reimbursements are considered, health care expenses can typically increase significantly in the retirement years.

According to research conducted this year by the Center for Retirement Research (CRR) at Boston College and underwritten by Prudential Financial, at age 65, a typical married couple can expect to spend $197,000 on remaining lifetime health care costs-excluding nursing home care.

The same couple faces a 5 percent probability these costs will exceed $311,000. Including nursing home care, the mean cost is $260,000, with a 5 percent chance these costs will exceed $570,000.