5 Tips to Control Your Fear in Retirement | Rodgers & Associates – Rick Rodgers

5 Tips to Control Your Fear in Retirement

Fear of Money or Losing Money can Force Bad Investment Behavior

Chremato­phobia (also called Chrome­to­phobia) is the intense fear of money. Some phobics are only afraid of the corrupting power of money, while others might fear financial failures or the respon­si­bility money brings[1]. News stories about market volatility can also lead to fear of money. The respon­si­bility of saving and investing, and potential for bad invest­ments, can also lead to a tremendous fear of money.

Another source/cause of chremato­phobia is retirement. An article in the Journal of Accoun­tancy[2] last year stated the top concern of 41% of CPA financial planners’ clients was running out of money in retirement. Longer life expectancies, healthcare costs (especially long-term care), economic uncer­tainty, and low interest rates are all factors contributing to clients’ fears.

What can someone planning retirement do to avoid chremato­phobia during his or her golden years? Here are five steps to help ward off the fear of running out of money.

Learn to control spending before retirement

Spending is the often-overlooked variable pre-retirees should pay a lot of attention to. The ability to control spending should be required as a prereq­uisite for retiring. Future earnings are always uncertain. The stock market could grow like it has in the past or not. Social Security could pay the benefits promised but it could also be changed. These are things we don’t have much control over. However, we can control what we spend our money on and therefore change how much we spend.

Living within a budget teaches disci­pline. Money disci­pline can provide confi­dence you will be able to live on the income you’ve projected because you now have the skill you need to adjust spending if needed in the future.

Ensure Investment risk is under control

Unfor­tu­nately, there isn’t a “best” investment strategy to apply to every situation. The asset allocation between stocks and bonds will depend partially on other sources of retirement income–social security, pension, part-time wages, etc.–and the withdrawal rate needed from invest­ments. Asset allocation has a more meaningful impact on the sustain­ability of retirement income when investable assets produce a sizeable amount of income. Getting the allocation right is critical to control fear during down markets. The 2016 edition[3] of Dalbar’s Quanti­tative Analysis of Investor Behavior showed the average equity mutual fund investor under­per­formed the S&P 500 index by 4.7%. In other words, the average investor only captured 60% of the return of the market.

Dalbar’s research states the inability of individual investors to remain invested over time is a big detriment to their overall perfor­mance experience. An investment strategy that limits risk to only the amount needed to reach objec­tives can help investors stick to their strategy and avoid jumping in and out of the market.

Maximize Social Security benefits

Social Security benefits are an important part of everyone’s retirement plan. Devel­oping a strategy before you retire is very important to maximize benefits and minimize taxes at the same time. When to draw benefits, who should draw first, and how to minimize the impact of income taxes on benefits, are questions that should be answered to get the most from this important government program.

Many articles say retirees should wait until 70 to draw if they are healthy. Waiting to draw is not always the best choice. Financial consid­er­a­tions, other income resources (pensions, deferred compen­sation, etc.), part-time income and health issues all come into play. Survivor benefits are also an important consid­er­ation when there are age differ­ences.

Plan healthcare as carefully as income

Last year, Fidelity estimated the cost of health care in retirement at $260,000[4]. Health care is one of the largest expenses for people in retirement. Fidelity’s estimate doesn’t include the cost of long-term care. That expense adds another $130,000 to the bill!

Getting control of these costs starts with your health insurance coverage. Does your employer provide coverage for retirees? If not, you will need your own coverage or a supplement if you are eligible for Medicare.

One of the most complex issues you will face when you reach age 65 is what to do about Medicare. The first step to enjoying the full benefits of the Medicare system is to under­stand how the programs work. Medicare is divided into three parts:

  • Part A: Hospital related expenses
  • Part B: Doctor’s services and outpa­tient medical services, laboratory tests, X‑rays, and therapy
  • Part D: Prescription drug benefits

Finally, the National Associ­ation of Health Under­writers states that one in three people will need some type of long-term care. If you can’t afford to self-insure for this expense, you may need to consider some form of long-term care insurance.

Consult a retirement planner

Each person planning for retirement faces his or her own unique circum­stances. This is where a good retirement planner can help.

A typical 65-year old couple will face 25–30 years of uncer­tainty. An experi­enced planner can evaluate proba­bil­ities and help you plan for uncer­tainty. The planner should be able to offer a realistic appraisal of your finances and your lifestyle to help ensure a sustainable retirement. Managing invest­ments in retirement is different than managing invest­ments while working and growing a portfolio. Properly struc­turing an investment strategy to create a sustainable withdrawal rate is a skill you don’t want to figure out along the way. A retirement planner can evaluate if you are on the right path to handle the ups and downs of the market while minimizing risk.

Retirement planning is an ongoing process. To avoid becoming chremato­phobic, you should check in with your financial adviser regularly. Verify that your financial strategy is performing as expected and make any adjust­ments when needed to stay on track.

Rick’s Tips:

  • Controlling your spending habits should be required as a prereq­uisite for retiring.
  • Setting the right asset allocation is critical to help avoid the risk of making a mistake during down markets.
  • Maximizing Social Security benefits is an important part of everyone’s retirement plan.

[1] Source: Fearof​.net. The Ultimate list of phobias and fears.

[2] Americans’ biggest retirement fear: Running out of money. By Lea Hart. Journal of Accoun­tancy, October 6, 2016.

[3] 23rd Edition of DALBAR’s Quanti­tative Analysis of Investor Behavior

[4] Health Care Costs for Couples in Retirement Rise to an Estimated $260,000, Fidelity Analysis Shows. Fidelity​.com. August 16, 2016