Why do most people go broke in retirement? Contrary to popular belief, it’s not because of a lack of diversification or savings. Rather, it has to do with liquidity (or a lack thereof).
Over the next two minutes, Steve McDonald explains everything you need to know.
The reason most people go broke in retirement is not because they failed to diversify or even that they didn’t have enough saved. Most people, retired or otherwise, go under because they don’t have liquidity.
Just because you hold an asset does not mean there is a ready buyer for it. And if push comes to shove, and you don’t have the cash or can’t liquidate your assets quickly, you are in real trouble.
You know what I’m talking about. The equity in your house looked really good until 2008 came along. And, remember, there have been three major sell-offs in real estate since I left college in 1975.
Getting your equity out in 2008 was impossible. The other two sell-offs weren’t that much better.
Or collections… I have a friend with a fortune in a collection of glass. She sees it as her “hidden stash” as she calls it. Well, I have news for her. When the market tanks, so do prices on collectibles.
Buyers always seem to disappear as soon as you are in a really tough spot.
No buyers, no cash!
And this problem of liquidity is being compounded today by the rush of the newly retired boomers to get rid of all their debt. According to the Employee Benefit Research Institute, 44% of boomers are concerned about how much debt they are carrying into their golden years.
Obviously, less debt is better. Zero debt is best. But using all or most of your liquid assets, your cash, to pay it off may be creating a bigger problem than the debt poses.
If you’re sitting on a mortgage – and who isn’t right now – paying it off may not be the best idea. Not if you have to use all or a big part of your cash.
And definitely not if you have to sell your income-producing assets (bonds, REITs and dividend stocks).
Before you dump all your cash into someone else’s pockets, work through the numbers. You may be better off keeping your assets and setting up a plan that generates enough cash to pay all or most of your monthly nut.
$100,000 can easily generate $7,000 a year in income in corporate bonds. That’s $583 a month.
You might be better off paying your bills and keeping your money, too.
If worse comes to worst and you just can’t live with the debt hanging over your head, you can always cash out and pay it off. But once you give your money to someone else, it’s gone forever, and so are your options.
There is no golden rule about debt in retirement, and zero debt is not a requirement. Before you give away your money, work through the numbers and consider all the possibilities.
Don’t let fear of manageable debt force you into a corner in retirement.