4 big retirement mistakes (and how to avoid them)
Despite the chatter you’ve probably heard over the years – at work, at family reunions, or at neighborhood barbecues – few people know as much about retirement planning as they think.
Of course, your friend might know a thing or two about stocks and bonds, or the pros and cons of annuities. And your sister-in-law may have done extensive research to get the most out of Medicare.
I don’t want to belittle their diligence. But the advice they offer you is probably not enough. For one thing, what worked for them might not be the right thing for you. And – just as important – they undoubtedly skip over some really important stuff.
How can I be so sure? Because in my nearly three decades as a financial planner, I’ve seen people make the same costly mistakes over and over again when it comes to planning for retirement. They didn’t know what they didn’t know, so they never saw the big risks coming.
The point is, you can avoid these common mistakes – or at least prepare for them. Here are the four I see most often:
Gaffe n ° 1: not respecting social security enough
Social security is one of the most important sources of income for many retirees. According to the Social Security Administration (SSA), among older people on Social Security, 50% of married couples and 70% of single people receive 50% or more of their income from Social Security.
Yet retirees often don’t put much effort into deciding when to file their much-needed benefits.
In a 2019 report from the Michigan Retirement and Disability Research Center at the University of Michigan, 22% of retirees in the sample said they regretted claiming their Social Security benefits when they did. (with 20% of them saying they should have claimed them later).
How and when to start collecting your benefits is a critical decision, even for high earners. Do your research. If you’re married, consider how your choices might one day affect your surviving spouse. And if you still don’t know what to do, get some advice.
Friendly people in your local SSA office are not allowed to make complaint recommendations. And not all finance professionals are experts on this subject. But I think you will find it worthwhile to find an advisor who is.
Mistake # 2: ignoring the risk of the return streak
If you are considering using the money invested in the market as a source of retirement income, this is the monster in the closet. Most people I talk to have never heard of return sequence risk, even if they work with an investment advisor or broker.
Here’s what it is and why it’s important: When you retire, you don’t add more money to your retirement account. Instead, you start making withdrawals. If your money is in the market, these market returns become essential to maintaining a reliable retirement income stream. If stocks are at their lowest due to a big correction or crash, you are withdrawing money from declining accounts, which could dramatically reduce the longevity of your plan.
When this correction or accident occurs at the start of retirement, or just before you arrive, it can seriously derail your plans. On the one hand, this is usually when you have the largest balances in your accounts, hence the greatest exposure to a major loss. And even when the market recovers, you might not get over it.
Fortunately, there are ways to minimize the sequence of damage that the risk of return can cause. You might find, for example, that it makes sense to reduce your exposure to volatility with a more conservative portfolio composition. A well thought out and prudent retirement income plan should provide flexibility when the markets are up.
Whatever you do, don’t take this threat lightly.
Mistake # 3: Not having a plan for future long-term health care costs
According to the US Department of Health and Human Services, a person who is 65 today has about a 70% chance of needing some type of long-term care and support service later on. Most married couples believe they will provide this care, but it is not always possible – and it can devastate the health of a caregiver who is not physically or emotionally equipped to cope with the needs of a child. to be expensive.
Unfortunately, calling on outside help is getting more and more expensive. The same goes for traditional long-term care insurance, which can help cover many of these costs. (These types of policies are also increasingly difficult to find.)
The good news is that there are several new solutions for those on a fixed budget, including fixed indexed annuities and retirement life insurance plans that offer long term care and / or death benefits. accelerated. I know: annuities tend to get a bad rap. And many retirees think they don’t need life insurance once they reach a certain age. But there are benefits to be had if you can work with someone you trust to choose the right products for your needs.
Mistake # 4: Leaving the IRA Money to the Heirs
Individual retirement accounts (IRAs) are, by their very nature, meant to be depleted during the life of the account owner. Indeed, the IRS encourages it. Even if you don’t want or need to withdraw the money during your retirement, you must receive the Minimum Required Distributions (RMD) each year starting at age 72.
But what if you don’t empty the account and instead leave the money for your children?
Due to recent changes in tax laws, your kids will only have 10 years to empty the account – and they’ll pay taxes based on their tax bracket when they make those withdrawals, not your income bracket. ‘taxation. If they’re in their prime paying years (which they often are), a lot of the money your kids would have benefited from could end up going to the IRS.
If you’ve put the bulk of your savings into a tax-deferred account (a 401 (k), 403 (b), traditional IRA, etc.), you’re not stuck. During your lifetime, there are ways to change taxable dollars into non-taxable dollars, such as a Roth IRA conversion.
Yes, the amount you transfer will be taxed to you as regular income, but done correctly you may be able to minimize the amount you pay now. and make things easier for your kids in the future. Once in the untaxed account, this money can pass tax-free to your heirs. And it will also be available to you tax free, if you need it for your own needs. Some advanced strategies, such as charitable residual trusts, can allow you to significantly reduce or avoid income taxes altogether. A qualified financial planner, along with an estate planning lawyer and CPA, can help you determine the strategies that are right for your family.
Chasing your retirement dreams is hard enough without making these common blunders. As you listen to the tips and stories of others, keep in mind that real knowledge is power. Don’t hesitate to seek professional advice when designing your retirement income and tax retirement plans.
Kim Franke-Folstad contributed to this article.
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President and Founder, Xexis Private Wealth
As President and Founder of Xexis Private Wealth (www.xexiswealth.com), Dan Brooks has been helping Central Floridians prepare for retirement for over 15 years. Originally from Iowa and a veteran of the Navy, Dan moved to Florida in 1998. After completing the CERTIFIED FINANCIAL PLANNER ™ (CFP®) program in 2004, he opened a registered investment advisor company in 2005.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm to prepare this article for submission to Kiplinger.com. Kiplinger received no compensation.