3 Mistakes That Wipe Out Million-Dollar Nest Eggs, According to a CFP

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For many people, reaching $1 million or more in retirement savings sounds like a surefire way to retire comfortably. But before you start dreaming of carefree golden years, it’s important to understand that million-dollar nest eggs can easily be wiped out by simple mistakes.

The problem usually isn’t blowing through your retirement savings by buying a yacht the day you leave your job, or seeing all your investments wiped out from a stock market crash. There are ways to prevent these types of mishaps, like through diversification, adjusting investment risk as you age and knowing what you can afford.

Still, some less flashy issues can easily bring down your retirement plan. In a recent YouTube video on his Retirement Made Simple channel, Kevin Lum, a certified financial planner (CFP) and founder of Foundry Financial, shared the following three mistakes to watch out for.

1. Not Planning for Long-Term Care

The first mistake to avoid, according to Lum, is not accounting for the cost of long-term care. This could be factoring in the cost of long-term care insurance, along with expectations of uninsured costs.

While it’s not easy to know exactly what care you’ll need, you don’t want to ignore the issue altogether. Working with a financial planner, you might be able to more accurately model how much to budget, based on factors like your age, health history and insurance.

But if you ignore the issue altogether, that can be expensive. Around 70% of adults age 65+ will need long-term care, according to the U.S. Department of Health and Human Services, and they’ll need this care for about three years. 

A Schwab analysis, based on Genworth data and this three-year timescale, then suggests that a retiree now might need to budget $226,512 for an in-home health aide or $350,400 for a private room in a nursing home, and those costs could significantly increase in future years.

So, that could take a big bite out of a million-dollar nest egg, especially if you end up on the high side of the average. 

2. Not Planning for Cognitive Decline

Another big issue is not planning for cognitive decline, noted Lum. 

He pointed to research from economist Lewis Mandell that financial abilities peak at around age 53 before declining. And while there’s some nuance there, like with investment knowledge peaking around age 70, this still means that many retirees have to face the uncomfortable truth that they’ll be less equipped to make financial decisions later in life, explained Lum.

Worse, said Lum, this isn’t something you typically can see coming. Don’t expect to make adjustments while you’re in the midst of cognitive decline, but if you want to avoid investment mishaps that can derail your portfolio, fall victim to financial scams, and other potential obstacles, then consider planning ahead.

For example, you might rely on a support network, like your adult children, to help you make financial decisions later in life. A financial advisor might also provide some guardrails.

3. Not Knowing Your Actual Monthly Spending

Lastly, and perhaps most importantly, not knowing your actual monthly spending can make retirement planning fruitless. As Lum pointed out, even relatively modest changes, like spending $10,000 per month instead of $8,000, can significantly reduce your likelihood of retirement success.

If you don’t know how much you currently spend or can’t realistically say how much you’ll spend in retirement, then you don’t really know if $1 million or more is enough in retirement. 

You might have a nest egg number that sounds high, but you’d be surprised how quickly it can go. A $1 million portfolio that earns 5% annually generates $50,000 in income. But if you spend $10,000 per month, that means you’re spending $70,000 more per year than that $50,000 in initial returns. So, that starts to shrink your retirement portfolio, meaning you’re earning less in investment income each year, while your withdrawals continue to chip away at the principal.

Rather than getting to the point where you have nothing left a decade or so into retirement, you need to plan ahead by knowing what you will realistically spend so you can plan accordingly.

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