CNBC Digital presents the fourth in a series of five articles by members of its Financial Advisor Council on worst-case financial scenarios affecting clients in four age brackets: millennials and younger Gen Xers; people in their 40s and 50s; 60-somethings and preretirees; and those already in retirement. This week's guest contributor is Barry Glassman, founder and president of Glassman Wealth Services.
The years just before retiring, when you're in your 50s and 60s, are the most critical to having a successful retirement. Typically, these are your peak earning years, when many of your larger expenses-such as buying a home or funding your children's college educations-are finished.
But as you take the final turn before retirement, there can be challenges to having enough money to live on when you stop working. Younger people have time on their side to catch up or recover from poor choices or unfortunate circumstances. In later years, time may not be the only thing you're running out of. You may not have the same opportunities to restart at this age.
I've watched many people succeed and fail at retirement over the years. Here are six things I recommend you avoid when you're in your final preretirement years, because the outcome is all too often financial disaster.
1. Spending too much. Many people in their 50s and early 60s enjoy earning more money than ever before in their careers. With the kids in or finishing college and equity sitting in their homes, there is more disposable income and more time to spend it.
A lot of families end up going one of two routes: either spending freely on many things they perhaps denied themselves before-such as expensive trips, dining out frequently and shopping trips-or remaining focused on building up their nest eggs to make sure they'll have enough when they retire.
It's not hard to guess which ones end up in trouble. People who increase their spending along with their income instead of saving those extra dollars for a retirement that may last 30 years can end up running out of money down the road.
2. Using accumulated assets to fund spending. Even worse than spending most or all of a paycheck to live a high lifestyle is spending down accumulated savings while still working. Many people see this pool of assets sitting there and find it tempting to tap the portfolio for the new car or that trip to Europe. It's easy to justify taking some of your savings for things you may have denied yourself over the years. But living beyond your means, relative to your income-especially when you are in your final years before retirement-rarely ends well.
3. Not having a retirement plan. It never ceases to amaze me that so many people just don't have a retirement plan. You must take the time to consider what your retirement will look like. So many people really don't know if they have enough money set aside for retirement or understand what amount they will need to save while still working. Without a plan, how will you know if you have enough?
Once you begin your retirement, it's just too late. At that point, the only thing left to do is alter your lifestyle and cut expenses.
These last two situations, for me, are the worst of the worst-case scenarios for preretirees. I've had to counsel several clients who found themselves in these very tough situations.
4. Turning recurring income into a recurring liability. I call this situation the "lottery winner's folly." Most lottery winners go bankrupt because, rather than saving and investing their winnings, they buy high-priced toys that not only depreciate but come with hefty annual expenses as well. That's the boat or the equine hobbies.
Not only is money being taken out of a portfolio that could grow and provide income but the purchases will decrease in value and come with added costs-so it's a double whammy. Reducing income and adding expense is a disastrous combination for most retirees' portfolios.
5. Funding a business venture with an employment buyout. Losing a job is always difficult, especially for those in their 50s or early 60s with high-paying jobs. You can find many who are among the casualties of the recent recession. Some were fortunate and received a cash buyout or severance from their former employers. It's when they take that money to start up a company or entrepreneurial venture that the trouble starts.
I'm all for someone funding a dream, but all too often there's simply not enough reality in such ventures for success. One client kept investing $100,000 to $200,000 in his venture every year, slowly depleting his buyout until it was too late. The burn rate of his investment was just not sustainable.
The challenge is that at every stage, it's easy to justify putting more and more money into a business. In this situation, the entrepreneurial dream can only last so long. At some point, people need to face the very real prospect that they will have to close the doors on their dream and get a job.
6. Refusing a pay cut. Another mistake I commonly see-for those who received a buyout or severance and are now looking for employment-is expecting to find a job with the same income they were making prior to their buyout or severance.
I've had clients making annual incomes in the high six figures who wouldn't take a job for less-never mind significantly less-because they said it wasn't worth their time. They dabbled in a few business ventures or tried consulting, and after several years they just ran out of money.
At some point, my advice to these clients is simply: "Get a job." Even some additional income is helpful to making savings last longer.
The 50s and early 60s can be great years for building up a sustainable retirement. But like the board game Chutes and Ladders, there are decisions we make that can move us up and others that can cause us to slide down.
If you're in your final years before retirement, you simply don't have the time to start over, so it's important to stay away from the things that can set you back financially-no matter how tempting.
