transcript

I've seen a lot of DIY financial plans over the years, and these are the 3 biggest mistakes that I typically find.

Health care costs.

Let's start there. If you are using the number that you spend on health care now and assuming that is what you're going to spend in retirement, it's probably not enough. There are exceptions, but for most people, what they're spending right now on health care is subsidized by an employer. When they are on Medicare, that number is going to be bigger. You need to make sure you're using an accurate assumption there.

The other big mistake that I typically see is people that retire before 65, so before you're eligible for Medicare, and you need health insurance, you're going to have to get a private policy which is really expensive. You need to make sure you have a high enough number there to be conservative.

The other piece of that is the inflation rate. If you are assuming that healthcare costs are inflating at the same rate as groceries, that's inaccurate. Historically, it's inflated at a much higher rate. So you want to make sure you account for that.

Sequence of Return Risk

When I look at these DIY plans, they typically show an average rate of return, let's say 6% every single year. Of course, that is not what the market does. We're going to see above-average and below-average to come to that 6% over the long term.

You might think that the sequence of returns that you see don't matter as long as you hit that average, but that's not true. It actually matters a lot.

If you retire and you have below-average returns for that first decade, followed by above-average returns for the next decade, you may find yourself in a worse position than someone who saw the opposite. And of course, we don't know when you're going to retire and what your luck is going to be. You need to be able to stress test your portfolio just to make sure that it's resilient and you can meet your financial goals no matter what you end up facing.

Taxes

I understand the taxes are so complicated that people tend to want to oversimplify, but that's just not going to cut it for your retirement plan. I've seen a lot of different mistakes. Here are the most common:

(1) Not understanding how withdrawals will be taxed.

It depends on the different types of accounts it comes from, basis, is it a non-deductible IRA? All of those things are going to relate into how much your tax bill will be that year.

(2) Not understanding RMDs and how that's going to affect other things.

(3) Not understanding the implication if there's a law change.

The Tax Cuts and Jobs Act, for example, is set to sunset in 2025. If that changes, how does that flow through to your financial plan and meeting your goals?

If you're a DIYer and you've got your financial plan, pay special attention to these 3 items - the healthcare cost and the inflation rate associated with it, sequence of return risk, and the tax implication of moving into your retirement. My name is Linda Rogers, Owner of Planning Within Reach.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.