Retirement is supposed to be a chapter in one’s life that is full of joy. You finally have time to do the things you’ve always wanted to do. Maybe that means spending more time with family, starting a new hobby, or traveling the world. Healthy financial habits and proper financial planning should have set you up to do these things. However, every day we see individuals who are approaching retirement or are already in retirement make mistakes that derail their plans to be financially independent.
Here are some of the most common mistakes we see, and how you can best prepare yourself to live the retirement you’ve always dreamed of.
Mistake #1: Not Having or Updating a Financial Plan
In your 60s, you need to make some important decisions that will have a significant impact on your retirement. Ideally, you should be prepared well in advance in understanding how each choice will impact your financial future. For example, a few decisions that will have a direct impact on your financial independence include:
- At what age will you retire?
- How much money do you need in retirement?
- When will you initiate Social Security Benefits?
- What pension option will you select?
If you do not have a written comprehensive financial plan before retirement, you should meet with a certified financial planner to ensure you are making informed decisions. This plan should address your cash needs in retirement based on current or expected spending, as well as social security and pension collection strategies. Be sure to address how you will replace income at retirement and fund any cash shortfalls during the year, and how to do so in a tax-efficient manner. A written plan should provide you with different scenarios to help you consider multiple options, even those you might not be aware of.
If you had a financial plan in the past, you should have it updated to verify your current situation has not changed. Your financial plan should be viewed as a living document, not something to be written once and forgotten. Life changes, and your plan should reflect that.
Mistake #2: Taking Social Security Too Early
Since social security benefits comprise a significant revenue source for most retirees, deciding when to collect is a critical part of the overall plan. You are eligible to collect social security retirement benefits at your full retirement age, which is 66 for those born in 1954 and prior. You can receive a reduced benefit before this—equivalent to 6.25% per year or over 25% in total over your lifetime —starting at age 62. You can also delay the collection of benefits to age 70, with the benefit increasing 8% per year from age 67 through age 70. Whether to collect early or to wait is not a simple decision. You need to consider your health, longevity, and financial need. An ill-informed decision at age 62 could have a significant negative long-term impact on your financial plan.
Mistake #3: Underestimating Expenses and the Impact of Inflation
Another common mistake is assuming that expenses decrease in retirement. Typically, expenses increase early in retirement as individuals enjoy their freedom. They travel more and take on new hobbies. Medical expenses also tend to increase as we age. We recommend talking to retired friends who live a similar lifestyle to see what additional costs they incurred.
Another expense often overlooked is the cost of care for an aging parent or an adult child. This could mean having less money available to meet your retirement goals than initially expected.
The impact of inflation on a retiree’s expenses can also be significant, as certain costs for older persons have a higher than normal inflation rate. This includes health care and housing maintenance costs, which increase at a higher rate as you age.
Mistake #4: No Long-Term Care Plan
Having a long-term care plan does not necessarily refer to insurance, although an insurance policy can certainly be part of your long-term care plan. The cost of long-term care can be one of the biggest threats to your financial independence. The estimate is that more than 70% of people over age 65 will need some sort of long-term care in the future. To see costs in your area, look at the Genworth 2018 Cost of Care Survey online.
You should have a plan that states how you want to be cared for should the need arise. Remember, long-term care is custodial care, not medical care. You should address the following questions:
- Where do I want to be cared for (i.e., at home or in a facility)?
- What type of facility will it be?
- How will I pay for care?
- Who will be in charge of my care?
A long-term care insurance policy helps to address some of the concerns about how you will pay for care, but it does not address the other questions.
Mistake #5: No Estate Plan
An estate plan ensures your wishes are met at your incapacity or death. The plan usually consists of three documents:
- A Will states how you would like your assets to pass at your death and who will act on behalf of your estate (executor role).
- A Power of Attorney declares who can act on your behalf on financial matters if you become incapacitated. This can be as simple as writing your monthly checks, or as strategic as meeting with financial advisors.
- Your Living Will (or Advance Medical Directive) names the person who can speak to your medical professionals if you are unable to act on your own volition. It also states how you want to be treated in life-ending situations.
Not having an estate plan can be costly to you, as well as your estate and heirs. If you have not prepared an estate plan, you should do so immediately. Assuming you have these documents in place, review them every three years to ensure they continue to reflect your wishes. It’s always possible that your circumstances may have changed since you created (or updated) the documents. Things to review include the value of your estate, the executor you assigned to manage your estate, and how you want your estate to be distributed (including whether to leave assets in trust for your heirs or leave them outright). Also, ensure that updates are not needed due to changes in the law.
Mistake #6: Underestimating Your Life Expectancy
If you retire in your early 60s, you may live in retirement as many years as you were working. A person currently age 65 has a 25% chance of living past age 90. A couple who are age 65 has a more than 50% chance of one of the spouses living past age 90. If you underestimate your life expectancy, you might make a hasty social security decision or have an investment portfolio that is too conservative to meet your long-term needs. If you underestimate how long your assets will need to last by planning to age 85, you may outlive your money and not have sufficient funds to meet your ongoing needs after age 85.
Mistake #7: Not Signing Up for Medicare on Time
Medicare Parts A (hospital) & B (health) are available to most people age 65 or over. You have a seven-month window beginning three months before the month you turn 65 to enroll in Medicare Part B. If you are collecting Social Security at age 65, you are automatically registered for Parts A and B. Failure to register timely will result in a late enrollment penalty of 10 percent on your monthly premium for each 12-month period you were eligible for Part B — for the rest of your life. If your current employer still covers you at age 65, you may be exempted from this penalty.
Your monthly premium will go up 10 percent for each 12-month period you were eligible for Part B but didn’t sign up for it, unless you qualify for a “Special Enrollment Period” (SEP).
Mistake #8: Forgetting to Take Your Required Minimum Distribution from Qualified Retirement Plans
If you own an IRA, 401(k), or 403(b), you are required to start taking distributions from the account in the year you turn age 72. If you forget to take the distribution, the penalty is 50% of the amount you were supposed to withdraw.
Mistake #9: Single Stock Exposure
Overexposure to one stock—whether it was an inheritance or stock accumulated through hard work at a company—can add significant risk to your investment portfolio. Consider the latter. If you have retiree medical benefits or a company pension, you are already relying heavily on that company during your retirement years. If your investment portfolio also relies on the company’s success, and something negative happens, your entire retirement plan could be impacted significantly. Also, if you are relying on your investment portfolio to provide for your lifetime needs, having the added risk of a concentration of any one stock could impact your retirement plan’s success. To reduce volatility, it is best to have a well-diversified portfolio invested in different asset classes, consisting of both equity and fixed-income investments.
Mistake #10: Not Adjusting Your Investment Approach or Being Too Conservative (or Too Aggressive)
You should always update your investment portfolio to reflect where you are in life. Unfortunately, not everyone adjusts their investment approach or asset allocation as they near retirement. Since this phase of life can last 20 years or more, we do not recommend getting to conservative if you anticipate a long retirement. Despite a common emotional reaction to want to be conservative, you’ll need to be invested in the equity markets to keep pace with inflation. It is also important not to react emotionally to market fluctuations. We recommend you do the following:
- Determine an asset allocation that you are comfortable with.
- Provide for your cash needs for three years.
- Rebalance your investments back to the original allocation goal on an annual basis (at least).
- Speak with your advisor about the benefits of a bond ladder, which will provide you with cash flow for a set number of years, reducing the stress of market volatility.
Mistake #11: Not Having Something to Retire to
Wanting to exit the rat race is a common goal muttered by soon-to-be retirees. However, people who retire ‘from’ something, as opposed to ‘to’ something, have a more difficult transition. It’s a good idea to spend some time during your pre-retirement years thinking about what you would like to achieve during retirement. This may include starting a business, traveling, or expanding hobbies. It’s a proven fact that staying active physically and mentally in retirement contributes to one’s longevity and quality of life.
The time is now to ensure your financial world is in order. You’ve worked hard throughout your life, and you deserve to enjoy your retirement years. If you don’t have an updated financial plan that addresses the topics above, call us to review your goals and your options.
This article is one of five written for our financial series that focuses on the most common financial mistakes people make in different decades of their lives. We first addressed the fundamentals that individuals in their 20s need to focus on, and how responsibility begins to take center stage in your 30s and it becomes even more important to develop healthy financial habits. We then discussed additional financial tips for individuals in their 40s and pointed out financial areas that pre-retirees should be contemplating. We encourage you to share these individual articles with your adult children and grandchildren so they can set themselves up for financial independence throughout their lives.