I’m a Financial Advisor: 7 Ways People Become Poor in Their Later Years (From GOBankingRates) [2 Articles]
~ Saturday, October 28, 2023 Blog Post ~
By Jordan Rosenfeld, October 25, 2023
Retirement is often romanticized as the time when hard working Americans finally get to slow down and enjoy a life of leisure, free of the worries and stressors of their earlier years.
And yet, this is not always the case, particularly if people have not planned properly for their retirement, have poor spending habits, or meet with unexpected expenses. It is, unfortunately, quite possible to find yourself in or near poverty in your later years.
GOBankingRates spoke to financial advisors, Joseph F. Myer, CFP(r), President of Courser Capital Management, LLC and Michael Ryan, a financial advisor and owner of the financial literacy website Michael Ryan Money, to discover the ways that people become poor in their later years, so you can avoid them.
1) No Margin of Safety
Myer said the biggest contributor to people becoming poor in their later years is not having a financial buffer for the unexpected.
“The unexpected is a broad term, so some of the things I’ve seen over my career include severe market disruptions and recessions, large housing repair expenses, or adult children who become financially dependent.”
2) Assuming Investment Professionals Can Predict the Future
Market participants often assume that highly educated and highly paid investment professionals can predict the future, Myer cautioned. “This flawed assumption can lead to over confidence about future market performance and create financial vulnerabilities.”
He shared that, based on research from Paul Hickey of Bespoke Investment Group and a 2020 New York Times article by Jeff Sommer, “Each December since 2000, the median forecast never called for a stock market decline over the course of the following year… and yet the stock market lost money in six of those years. Since these observations were made by Hickey and Sommer, the market chalked up yet another losing year in 2022.”
3) Pension Elections That Undermine Stability
Your later years, particularly retirement, are the time to take money from your pension. However, Myer warned, some pension elections can undermine a couple’s financial stability if one of them dies.
“The highest pension payout option is always when it’s based on a single retirees life expectancy,” he said. “If the husband or wife who has earned the pension dies prematurely, a major pillar for a couple’s cash flow goes away if they choose to take the highest payout option.”
4) Tying Up Wealth in Your Home
Homes can be an effective way to accumulate additional wealth, but homes also fall into the category of being a non-working asset. Myer explained, “This means that homes do not produce cash flow, they demand cash flow in the form of maintenance, taxes, insurance, improvements, etc.”
Thus, if a retiree has been too fixated on reaching retirement without having a mortgage and hasn’t saved enough in portfolio assets, “they will eventually discover their home detracts from their finances until they sell it… then they have to move somewhere else!”
5) Lack of Financial Planning
Michael Ryan said that the most common issue contributing to later in life poverty is a lack of comprehensive financial planning early on.
He said, “Many rely on quick estimates or simple projections without fully modeling out their needs over decades. They fail to account for how much savings is required to maintain their lifestyle over potentially 30+ years in retirement.”
True financial planning considers all assets and income sources over time, he explained, and that is also something that should be revisited every so often, as well.
6) Underestimating Inflation
Another major factor contributing to poverty is underestimating the impact of inflation, Ryan said. “Expenses don’t remain static-healthcare, housing, food, and other costs rise significantly over time. People often just look at the total savings they accumulate without understanding how inflation erodes purchasing power.”
While people who have saved close to $1 million may think it’s enough, he pointed out that it is worth much less in 25 years. “Modeling different inflation scenarios makes clear how devastating it can be.”
7) Overly Optimistic Investment Projections
Ryan also noted that a lot of people are also overly optimistic in projecting investment returns.
“Assuming annual 10%-12% growth is asking for trouble,” said Ryan. “Average returns are generally lower over time, often 6–8% depending on asset mix. And as one ages, investing usually becomes more conservative, lowering returns further.”
In general, Ryan said, unrealistic return assumptions skew projections. “There are many other factors like longevity risk and healthcare costs that trip up retirement planning. But the core issues are lack of comprehensive long-term planning, failing to account for inflation erosion, and overestimating investment returns.”
However, barring unexpected crises, health issues and the like, Ryan suggested that “with prudent planning and realistic assumptions, retirement security is achievable for most. But it takes diligence and help from knowledgeable advisors making projections over decades. There are no short-cuts when planning for 30 years of retirement.”
Source:
Article #2: 8 Ways People Become Poor While Earning a High-End Salary (From Yahoo! Finance)
By Angela Mae, October 27, 2023
The average annual salary in the United States is $56,220 across all occupations. So, when we think of a high-end salary, it’s significantly above that. In fact, many people consider a high-end salary to be anything in excess of six figures — that is, the $100,000 range or higher.
But even high-earners aren’t always in a good position financially. According to a LendingClub report, nearly half of people earning $100,000 a year still struggle to make ends meet. Rather than building wealth, a lot of these individuals are actually living paycheck to paycheck.
This might seem strange when you consider the numbers on their own, but the truth is that it’s very possible to become poor even when living on a higher salary. Poor money management, excessive spending, limited savings or investments, and a lack of financial preparedness can all keep even the highest earners strapped for cash.
If you’re wondering just how it is that people with a high-end salary become poor, here are some of the most common ways.
Overreliance on Credit Cards
Diana Howard, financial analyst at CouponBirds, suggested that an overreliance on credit cards is one of the main money habits that keeps high earners poor.
“Even [when] making a lot of money (like over $100,000), high earners may still end up losing it all and facing the same money management pitfalls as average earners. In some cases, it can even become easier,” she said.
“People with high incomes rely heavily on credit cards,” continued Howard. “A Quicken survey reveals that 46% of individuals with higher income depend more on their credit cards, compared to the middle-income groups (40%) and lower-income groups (39%). It’s pretty normal to have credit card debt, but once the balance is broken, rich people can sink deeper in the mud.”
Succumbing to Lifestyle Creep
Lifestyle creep is what happens when you start spending more money as your income increase. Sometimes, this increase in spending is disproportionate to earnings — and not in a good way.
“Lifestyle creep is real. That’s when you start adding more expensive features to your lifestyle over time. Before you know it, you’re overspending,” said Todd Stearn, founder and CEO of The Money Manual. “For example, many of us started with one streaming service but then we added another and another and before long, it’s a serious monthly expense. The same can happen with fancy restaurant dinners, nights out, travel, and more. Then, once you get accustomed to this lifestyle it can feel challenging to go back to living simpler.”
Not Making Tax-Efficient Money Moves
High earners still have to pay taxes, but many people in a higher tax bracket don’t pay as much attention to this as they should. This is especially prevalent when it comes to how they invest their money. This is a mistake that can keep high earners poor or with limited wealth-building potential.
“Being in a high tax bracket should cause [high earners who aren’t rich yet] to think harder about the ‘tax location’ of their investments and to take advantage of account types that offer tax shelters,” said Kelly Milligan, managing partner at Quorum Private Wealth. “Some investments that are highly tax-inefficient (e.g., taxable bonds and private credit funds) should ideally be located in tax-sheltered accounts such as IRAs, Roth IRAs, or 401ks.”
Highly tax-efficient investments, Milligan added, should be placed in taxable accounts. These types of investments include municipal bonds and certain real estate funds. Some high earners also skip out on important tax advice, but this can hurt them financially or keep them broke.
“Getting proper tax advice and knowing how to structure corporations and understanding write-offs is one thing that especially high earners need to have a good grasp of, or at least have good consultants to work with,” said Sebastian Jania, owner of Ontario Property Buyers. “Doing this alone will save someone lots of money in taxes.”
Trying To Keep Up With the Joneses
Keeping up with the Joneses is all about trying to show others that you’re on equal footing in terms of wealth or status, even if you don’t actually have the means to back it up. This can result in expensive purchases, taking on debt to fund a certain lifestyle, and limited assets or funds.
“As one increases their salary, it’s not uncommon to try to compete with those around them to have the nicest cars, houses, watches, and more,” said Jania. “The truth is, however, recklessly fighting for these things ultimately puts one in a spot where they are worse off financially than if they hadn’t made those purchases.”
Lack of Financial Discipline
Another common mistake that people with a high-end salary make entails being less disciplined or downright reckless with their money.
High earners often “get rid of the habits that got them to their level of wealth and their high salary,” said Jania. “For many people, this was discipline over time that resulted in these results. In many cases, this discipline came in the form of keeping savings high and keeping spending low, along with delaying gratification. Many people stop these habits and unfortunately create chaos in their lives.”
Having a financial plan can help prevent overspending or other poor money habits, and keep high-earners — as well as most anyone else — from becoming poor.
Skipping the Emergency Fund
Saving for emergency expenses like medical bills or a layoff at work is vital to building financial stability. This is just as true for high earners as it is for those with an average or lower salary.
“Life is unpredictable, unexpected events like medical emergencies or job losses can quickly drain savings and push people into debt,” said Howard.
“I advise all clients to build up an emergency fund of between 3 and 6 months of expenses,” added Milligan. “If you have liquid investments or access to reliable, low-cost credit, then you might get away with even lower reserve levels.”
Not Using Corporate Benefits Properly
Oftentimes, having a high-end salary comes with certain corporate benefits. But high-earners don’t always take advantage of these benefits — or they ignore them altogether. This could significantly impact their ability to successfully plan for retirement, which could leave them in a financially difficult situation in the future.
“I encourage every client to understand and take full advantage of their employer-offered benefits. Many companies offer 401(k) plans,” said Milligan. High earners “maxing out their 401(k) contribution defers taxes at the highest bracket into their retirement years when they are likely in a much lower bracket. In the meantime, their untaxed contribution compounds without any tax drag whatsoever, and a portion of that contribution is often matched by their employer.”
Another corporate benefit that should be considered, according to Milligan, is a non-qualified deferred compensation plans (NQDCs). These plans let people “defer up to 100% of their income, such as salary, bonus, or vesting stock units, giving them unparalleled opportunities for tax minimization.”
Not Planning Ahead
Having a sound financial plan is key to building and maintaining wealth. But a lot of people, including high earners, don’t look at the bigger picture or think about their future selves.
“A big mistake many high earners make is assuming the good times will roll on forever. It’s helpful to have a savings cushion in case you lose your job to a recession or if your riskier investments don’t pay off,” said Stearn. “We’ve all heard to the sad stories of professional athletes who started with nothing then got rich but lost it all due to extravagant spending. This can happen to any of us on a smaller scale. Take care of your future self before splurging.”
Sources and references:
https://finance.yahoo.com/news/8-ways-people-become-poor-170027930.html
https://www.gobankingrates.com/money/side-gigs/how-to-get-free-money/
https://www.gobankingrates.com/money/wealth/pennies-worth-money/
