DIY Retirement Planning: How Much Risk Are You Really Exposing Yourself Too?

Are you confident you’ve covered every aspect in your retirement plan?

Think you can handle it all?

Is DIY retirement planning exposing you to risks you’re unaware of?

DIY retirement planning is tempting and attractive to many, especially in today’s information-rich world. With so many tools, calculators, and resources available online, it can easily feel like a feasible option to handle retirement planning independently.

However, trying to decipher the information and determine what’s appropriate for you is a challenge.

Here are a few reasons why many are drawn to the DIY approach:

#1 Confidence from Self-Education: With a bountiful of resources like blogs, financial podcasts, and YouTube channels, people often find they have enough knowledge to go it alone.

They might have read articles, followed financial experts, and feel they understand the basics.

While self-education is fantastic, retirement planning involves more complexities than what can typically be learned from generalised information.

#2 Cost perception: One of the biggest motivators is the perceived high cost of professional advice.

Many people think, “Why pay someone else when I can do it myself for free?”. This perception can deter them from seeking professional help, even if it could save or earn them much more in the long run.

#3 Desire for Control: Many people like the idea of controlling their own financial destiny.

Making all the decisions themselves can feel empowering and personal, especially when they’ve saved and invested for decades. The DIY approach lets them feel fully in control.

#4 Simplicity Perception: Retirement planning might seem straightforward, particularly when someone focuses mainly on investments or super.

Some believe it’s just about saving enough, investing wisely, and withdrawing funds later. This oversimplification leads to the assumption that retirement planning doesn’t warrant outside expertise.

As retirement fast approaches, you can’t continue to do the same thing. Accumulation and decumulation (spending in retirement) are two completely different concepts which requires a change in mindset and knowledge.

Now, I’m not saying everyone needs a financial planner. In fact, there are currently not enough financial planners to service the expected consumer demand for advice over the coming decade.

Luckily we have capacity to take on 60-80 clients and then there will be a wait list. Why?

Because we aim to look after a small number of couples and individuals so we can put all our energy into helping them live their best life. One where there are no regrets…

The Biases That Reinforce the DIY Approach Which May Leave You Exposed

The inclination toward DIY retirement planning is often reinforced by cognitive biases, which can lead to critical oversights:

Overconfidence Bias: Many people overestimate their ability to manage their finances, believing that their level of knowledge is sufficient to make complex retirement decisions.

The same could be said for how we think about our driving abilities. It’s well known through research that we tend to think we’re better drivers that what we actually are.

This bias can result in costly mistakes, especially if they lack a holistic understanding of the nuances involved in retirement planning.

Recency Bias: Positive market performance can give DIY investors a false sense of security. If markets have been doing well, people may assume they’ll continue to perform that way, leading them to take on more risk than is appropriate as they approach retirement.

Confirmation Bias: People often seek information that supports their pre-existing beliefs about finances and ignore evidence to the contrary.

A good example is a couple I spoke with some time ago. Thinking the market had reached a peak, concerned they would lose money. Leading them to cash out and put it all in cash. Constantly sourcing doomsayers to back up their beliefs. This led to losses in the hundreds of thousands and more as they are likely to still be in that same position.

Confirmation bias can lead them to feel more confident about their DIY plans, as they may overlook risks or gaps in their strategies.

Availability Bias: Stories of friends or acquaintances who retired successfully without professional help can make DIY planning seem more feasible.

However, these stories often lack the full picture of the challenges and potential missteps in planning for a sustainable retirement.

While it’s understandable why DIY retirement planning is appealing, a successful, secure retirement requires more than just the basic financial knowledge.

Cognitive biases and hidden complexities can put DIYers at risk, potentially preventing them from enjoying the retirement they envision.

In a recent study by the Financial Advice Association of Australia found over 9 in 10 clients of CFP professionals feel financially secure compared to nearly 2 in 3 not working with an adviser.

Seeking expert advice can be a wise investment, even for those who feel confident in their abilities.

The Key Pitfalls of DIY Retirement Planning

#1 Miscalculating your “Enough” number

There are many inputs and outputs needed to calculate your “Enough” number. You need to consider your spending patterns, investment return, lifespan, age pension, inflation and many other factors.

Any change in one of these factors may provide you with a false “Enough” number.

A miscalculation will generally come from overconfidence in one’s situation. You’ve experienced above average returns. So you think it’s going to be always that way and use that in your calculation. But what if it does not eventuate? Then what?

A BIG one is longevity. The hardest question to answer. How long will you live? It’s one many underestimate which leaves them exposed to running out of money in their retirement years.

A professional in retirement planning can help you work through all the inputs and outputs which need to be considered in your unique circumstances. Helping you to build out a feasible and realistic retirement plan.

#2 Exposing Themselves to Excessive Investment Risk

There’s a great saying by the world’s best investor, Warren Buffett.

“Only when the tide goes out do you learn who has been swimming naked”

While many think they know everything about investing, many don’t know what they don’t know.

Many heading towards retirement are taking on more risks than they need to. Whether that’s the level of risk, i.e. exposing themselves to a greater level of growth assets than they need to.

Leaving them exposed to greater fluctuations in investment values throughout retirement.

Using a one size fits all approach without considering the longer term deterioration of capital as you spend your money in retirement.

Or the more common one in Australia, leaving yourself exposed to BIG companies which dominate the top 50 on the ASX.

Managing the level of risk you take is essential if you want peace of mind in retirement combined with less worry. What that is for each individual depends on their unique circumstances.

This is where an expert in retirement planning (not a product flogger) can help you work through all the nuances of your retirement plan. Work with you to balance growth, security, drawdown strategy and time horizon to safely navigate your retirement journey.

#3 Risk of Outliving Their Savings or Missing Out on Experiences and Memories

The biggest concern for people as they approach retirement is “Will I have enough?”.

It’s probably the most stressful aspect of retirement for many people. Most people just want reassurance they will be okay in their retirement years. That they aren’t at risk of running out of money.

Many DIYers don’t properly factor in longevity risks. Most think they will live shorter lives than they actually will (excluding any medical issues). This can put their retirement at risk if they haven’t considered or addressed how long their money will last.

Sure, it’s okay if you have plans to spend all your money by the age of 80 and then live off the pension. But what if you are still active at that point, but with no money? You’ll live in regret that you didn’t prepare better.

On the flip side, you might have more than enough but don’t know it. Yes, this is a risk. It’s a risk you didn’t do enough. Didn’t do more trips, help the kids out when they needed to or live more comfortably.

It’s a risk you didn’t spend time creating more experiences and memories you can reflect on in your older years. Memories and experiences you didn’t pass onto the next generation.

This is where an expert in retirement planning can help you work through all the scenarios to help you plan for your best life in retirement. In other words, helping you to use your money as a tool to create as many experiences and memories you possibly can.

#4 Missing Optimisation Opportunities

While the internet is full of ideas and information. Knowing what is relevant for you and how it applies can be a challenge in itself.

As a DIYer, you need to be an expert in taxation, superannuation government benefits and understand your own behaviour towards money. You need to understand the nuances to be able to maximise your opportunities.

Many leave opportunities on the table, money they could have saved which compounds over time. This may mean thousands and maybe hundreds of thousands you may miss out on.

Anything from making use of the contribution rules in the right time frames. Structuring your assets to maximise age pension for couples where an age gap exists. Taking advantage of new Lifetime Income strategies, access more age pension, secure an income for life and many more.

Leaving a generous tip to the tax office. This is one many overlook and it takes time to eliminate it.

These tactics and strategies can greatly improve your retirement outcomes if you know how to use and apply them. It’s complex for someone without specialised knowledge.

#5 Blind Spots In Their Planning

Mike Tyson said it best:

“Everybody has a plan until they get punched in the face”

It’s not what you know, it’s what you don’t know that’s going to catch you off guard. There’s a whole area of finance dedicated to Behavioural Finance.

It’s understanding the cognitive, overconfidence, recency biases and many others which may influence our decision making. These are your blind spots and you need to identify them and put in place safety margins to protect yourself.

Many trip up in retirement due to their blind spots. The stuff they don’t know.

This is where an expert in retirement planning, someone who’s walked the retirement path many times over with clients can identify your blind spots quickly. They can help you assess your plans, offering an external perspective through the lens of experience.

#6 Misjudging Retirement Timing

Are you at risk of working longer than you need to?

More time is what most people want. The time to relax, travel, spend time with loved ones, take up new hobbies or live life at a more relaxed pace. Either way it requires money. You may have the money, but just don’t know it.

If you don’t know how you’re positioned financially, you’re at risk of missing out on precious retirement years. You know the ones. Where you are fit and healthy enough to live life to the max.

Alternatively, you may stop work sooner than you should, jeopardising your financial future.

Wouldn’t you want to know? So you can take action sooner rather than later.

This is one area we spend a significant amount of time on with clients. Helping them work through various scenarios to determine what is right for them.

Some continue to work for a period. Some plan on retiring years earlier than they thought and others prefer to ease into retirement.

Whatever it is for you, a specialist in retirement planning can help you work out what is the right time to retire for you.

#7 Failing to Adjust Plans Over Time

Once you have a plan, you can’t let it sit on the shelf and collect dust. Life has many twists and turns and you will need to revisit your plan regularly to ensure it stays up to date and relevant.

There are many aspects DIYers can neglect which may leave them exposed.

Working with a retirement planning expert, they will continuously monitor and adjust your plans to ensure you stay on track. To ensure you protect your ability to live your best life while knowing at all times you’ll be okay.

Helping you to constantly assess your path, opportunities and risks to ensure you stay on the safe path through retirement.

The Value of Professional Advice

While DIY planning may seem cost-effective, professional advice can actually deliver greater long term value. Here’s how:

#1 Avoiding Costly Mistakes: Specialists in retirement planning help you steer clear of common pitfalls like underestimating expenses or taking on too much risk. They also guide you through complex regulations so you can maximise savings.

#2 Tailored Strategies: Professionals craft plans based on your unique goals and needs, providing flexibility to adjust as your life changes.

#3 Tax and Superannuation Optimising: Advisers know tax strategies and superannuation rules that DIYers may miss, helping to keep the money in your pocket.

#4 Objective Guidance: Provides a rational perspective, managing emotions and biases that can lead to poor financial decisions or outcomes, especially during market swings.

#5 Ongoing Monitoring and Adaptation: While not everyone needs ongoing advice, but with regular reviews, your adviser keeps your plan aligned with your needs and the market, minimising risks and capitalising on opportunities.

#6 Peace of Mind: Ah, I’m going to be okay feeling. With an expert helping you make sound financial decisions, you enjoy retirement without constantly worrying about running out of money or making a wrong move.

#7 High ROI on Advice: While there’s a cost to professional advice, it often pays for itself by optimsing returns, avoiding costly mistakes, enhancing tax efficiency and most importantly giving you the confidence to go and live life the way you want. It’s an investment in a secure, enjoyable retirement.

So what are you waiting for? If you’re within 7 years of retirement and you want to have the clarity and confidence you’re going to have enough. To know that you’ll be okay financially in retirement.

Not only that, but you have a plan to maximise your opportunities and avoid the many risks people expose themselves to. Then it’s time to have a quick chat through our Retirement Clarity Call.

If you’re ready to gain more clarity, confidence and control as your approach retirement.

Book your Retirement Clarity Call by clicking here. We’ll have a quick chat about what you’re struggling with and brainstorm how you can resolve your retirement worries.

Glenn Doherty – CFP – Financial Planner | Retirement Planning Specialist |Retirement Planning Made Simple for over 55’s within 7 years of retirement

We work with people in Adelaide and around Australia virtually via zoom!

Retirement Retirement Income Retirement Planning