Why Your $2–$5 Million Retirement is More Fragile Than You Think

It's easy to spend income. It is very difficult to spend principle.

When a professional retires with a net worth between $2 million and $5 million—a category we'll define as "rich" (the top 5–10% in the U.S.)—they are usually comfortable. But the line between "comfortable" and "in trouble" is much finer than most realize. It's rare to see these individuals go bankrupt, but it's common to see them forced into a drastic lifestyle downgrade (skipping big trips, downgrading flights) because their plan secretly fell apart.

The signs of financial failure are surprisingly common. After years of working with clients in this position, I want to share my experience so you can identify the signs and protect your wealth. You can also check out my video on this topic here.

The Four Drivers of Financial Failure

The journey to running low on assets in retirement often begins slowly, then hits a catastrophic tipping point. These four factors are the primary culprits:

1. The Windfall Trap

This is often counterintuitive: getting a sudden, exponential increase in your net worth—perhaps from selling a business or receiving a large inheritance.

• The Danger: A windfall can activate the "hot hand fallacy," making you feel like a better investor or a savvier spender than you actually are. It leads to the belief that the growth will continue indefinitely, and people start spending money much faster than they would have when they earned it via a paycheck. This inflated sense of financial confidence often results in spending too much money too quickly.

• The Protection: Recognize the windfall for what it is—a one-time event. Do not let it permanently inflate your lifestyle or risk tolerance.

2. Materialism (The Luxury Car Test)

You've heard this before, but it remains true time and time again: the people pulling up in the luxury vehicles and designer clothes almost always have less money than the people who are totally unassuming.

• The Danger: Materialism is often an attempt to compensate for a feeling of lack. Showy, expensive things are a poor external sign of internal wealth. This behavior, if adopted in retirement, accelerates consumption and diverts crucial capital away from investments.

• The Protection: Trust the quiet wealth of a conservative lifestyle. If someone looks wealthy, it's often a sign they are struggling with the very concepts your financial plan should solve.

3. Investment Mistakes (The 40-Year Disaster)

When you're working, you're converting your human capital (labor) into financial capital (investments) over 40 years. When you have all that financial capital aggregated, a single decision can impact 40 years' worth of work.

• The Danger: Immediacy leads to huge swings. Investment mistakes are often irreversible, but they usually stem from a single emotional choice made without a plan.

• The Telltale Sign: If you feel sick, queasy, or panicked when you are about to make a decision—especially a decision to buy or sell—that is the universe telling you that your emotions are running too high. Do not make the decision. Your panic is likely signaling that the decision will be poor.

4. Addiction (The Destructive Fire)

Addiction, whether in the retiree or an immediate family member, can start small and quickly become unmanageable.

• The Danger: Addiction is truly devastating. It wrecks relationships faster than the other three causes combined and costs a substantial amount of money to manage. When this factor shows up, it makes it incredibly difficult to maintain a lifestyle of abundance and surplus.

• The Protection: Take this issue seriously. If you recognize it in your family, do not underestimate its destructive potential. Getting it resolved quickly is imperative to protect both your family and your wealth.

Your Protection Plan

To guard yourself against these four destructive forces:

• For Windfalls: Do not get complacent. Treat the money as capital to be invested, not as permission to spend freely.

• For Investment Mistakes: Never make a decision while panicked. Have a written Investment Policy Statement (IPS) to guide your actions when you feel emotional.

• For Materialism: Focus on experiences and impact, not possessions. Do not measure your wealth against your neighbors.

• For Addiction: Recognize how destructive it is and prioritize resolution immediately.

Choosing to retire is challenging enough without inviting unnecessary risks. By being aware of these common traps, you stack the deck in favor of enjoying the wealth you worked so hard to build.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you build a resilient, disciplined investment plan and see if we’re a good fit.