I’m guessing that over the years you’ve read at least 1000 posts, articles, and ebooks on what to do before you retire. Good retirement checklists are about a dime a dozen in the online world. And even though most of them contain great information, you probably don’t need to review the same to-do’s for the umpteenth time.
So in this post I’ll spare you from a list of regurgitated tips you’ve seen before. Instead, here’s a list of the 17 biggest retirement mistakes I see in my practice. If you can avoid these issues after you stop working, you’ll be in much better shape than most retirees.
Retirement Mistake #1: Blowing it Early
Transitioning into retirement will be a big leap, no matter how much you plan and prepare for it. It should be a happy time, which you deserve after all the hard work you’ve put in, right?
Some retirees fall into the trap of overdoing it right after they stop working. With all the extra free time on their hands, it’s sometimes difficult to stay inside a budget. This can add up quickly if it’s not incorporated into your budget.
It can also have major repercussions on a retirement plan. One of the biggest risks you face after you retire is called “sequence of returns risk.” Basically, it says that a big hit to your finances will have a far greater impact earlier in your retirement than later. This risk is usually framed in the context of market conditions, but it also applies to spending. Plowing through your nest egg early on in retirement is far more risky than spending the same amount of money on a big purchase later on.
If you have your sights set on a vacation or big purchase, do it if it’s in your long term plan. But beyond that, try to spend according to your plan in the early years. You can always expand your budget later on if everything unfolds as you expect it to.
Retirement Mistake #2: Disregarding Higher Health Care Costs
A cardinal mistake I see from time to time is when retirees assume that their medicare costs will be consistent throughout their retirement. Don’t let this be you.
Every few years, Fidelity estimates what a 65 year old couple should expect to spend throughout their retirement. In it’s most recent release, the firm estimates a couple will spend on average $245,000. With advances in medical technology happening almost daily, this amount will probably go up as people continue to live longer.
You can help mitigate these costs by taking advantage of health savings accounts where possible, understanding your coverage, and planning ahead.
Retirement Mistake #3: Neglecting Taxes
As you approach retirement it’s important to devise a consistent financial & spending plan. That doesn’t mean that there aren’t opportunities to reduce your tax burden though.
Since you’ll probably have some assets in a tax deferred retirement account, you’ll have some degree of tax diversification. This means that when it comes time to draw from your nest egg to put funds in your bank account, you’ll have the choice between drawing from tax deferred or taxable assets. The money you withdraw from an IRA, for example, will increase your tax liability for the year. Withdrawals from a Roth IRA or taxable brokerage account (assuming you have no capital gains) will not.
Try to identify the years your income will be lower. You can take advantage of lower tax brackets by withdrawing from tax deferred accounts in those years. Then, save the tax free withdrawals for the years your liability is higher.
Retirement Mistake #4: Overconfidence in Your Investing Skills
Everyone likes to believe they’re above average….especially when it comes to driving.
The same goes for investing. Everyone (especially men) like to believe that they’re excellent stewards of their family’s retirement dollars, and are best equipped to protect them.
The truth is that most investors tend to shoot themselves in the foot when investing on their own. DALBAR, a financial services research firm, published a study each year that examines the returns of mutual fund investors. The most recent study found that:
- In 2015, the average equity mutual fund investor suffered a loss of 2.28%. The S&P 500 gained 1.38% over the same time frame.
- In 2015, the average fixed income investor suffered a loss of 3.11%, compared to a gain of 0.55% in the Barclays Aggregate Bond Index.
- In 2015, the 20-year annualized S&P return was 8.19%, while the 20-year annualized return for the average equity mutual fund investor was only 4.67%.
While not everyone needs a financial planner, beware the overconfidence bias. The wrong move can have disastrous consequences, and most times consulting with a professional is an excellent decision – even if it’s just confirming what you already know.
Retirement Mistake #5: Using a “Market Beating” Broker, Advisor, or Planner
No one can consistently outperform the market. And after accounting for fees and transaction costs, advisors who try essentially assure you that they’ll underperform. Use a consistent and low cost approach, not the guy with the flashy office and expensive suit.
Retirement Mistake #6: Not Planning for Long Term Care
Long term care is very often overlooked by retirees. And if you’ve ever cared for an aging parent or loved one, you understand the emotional and financial resources it takes. According to the US Department of Health, over 70% of people over 65 will require long term care at some point in their lives. Long term care costs are also rising rapidly, meaning that it’s important to incorporate them into your retirement plan.
Retirement Mistake #7: Retiring Too Early
As you know, there is a biggest difference between your working and retirement years from a financial point of view. When you’re working, the income from your job covers all of your living expenses. Plus, you’re probably adding to your nest egg each year (on a tax advantaged basis, no less).
When you retire those contributions stop, and you’ll take out money each year to pay for your living expenses.
By retiring early several important things happen:
- You shorten the period that you contribute to your nest egg, resulting in less savings when you retire
- You lengthen your retirement period, resulting in more stress on your retirement savings
- If you’re eligible for social security, your monthly benefits are reduced. This increases the amount you’ll need to pull from your nest egg each year, putting additional stress on your retirement portfolio.
Early retirement can be a wonderful thing, but it must be done thoughtfully. The worst case scenario is needing to go back to work after being fully retired for ten or fifteen years.
Retirement Mistake #8: Fleeing to Safety
Every single time there’s a market downturn, financial media proclaims a “flight to quality”. Investors sell stocks and buy less volatile assets like U.S. government bonds and CDs.
By following the herd you are keeping your money safe from the stock market, but at enormous cost. Not only does your money grow very slowly in these investments, it won’t even keep up with inflation. And over time, inflation will eat away at your purchasing power every year.
Fight the urge to sell stocks during times of financial stress. If you don’t keep a healthy portion of your nest egg in growth assets, you’re far more likely to extinguish your retirement savings prematurely.
Retirement Mistake #9: Believing All Bonds Are Safe
Bonds are typically viewed as safe alternatives to the stock market, and used as a ballast in your retirement portfolio. Not all bonds are created equal though, and some come with extraordinary risks. If an individual bond or bond fund offers an abnormally high yield it may appear attractive, but beware. It’s yield is higher for a reason. Additional return comes with additional risk. And if the bond ends up defaulting you’ll lose your entire investment. Keep an eye on bond ratings and manage accordingly.
Retirement Mistake #10: Ignoring Income Annuities
Variable and index linked annuities are generally very expensive products – and poor choices for most retirees. Income annuities on the other hand can be an excellent way to guarantee a monthly retirement income.
Keep in mind that the return on income annuities is based on interest rates. And with interest rates so low the returns will be poor. But for those looking to take risk off the table and convert a portion of their nest egg to a guaranteed monthly paycheck, an income annuity might be the right fit.
They can also be either immediate or deferred. Many retirees prefer buying deferred annuities that will start kicking off income in later years. This helps them supplement their income lost from inflation, and can provide insurance against outliving your assets. And if you have assets in an IRA, you can actually postpone your required minimum distributions by purchasing a longevity annuity.
Retirement Mistake #11: Taking Social Security Too Soon
Once you turn 62 you’ll be free to start collecting social security checks. But by doing so, you’re significantly cutting into your benefit amount.
Not everyone has the luxury of postponing benefits until full retirement age (or later). But if you can, do it.
For each month that you begin benefits before your full retirement age, your benefit amount will be reduced by 5/9 of 1%, for up to 36 months.
If you start benefits more than 36 months before your full retirement age, they will be further reduced by 5/12 of 1% per month. That means if your full retirement age is 66 and you begin benefits at 62, you’ll see a 25% total reduction in benefits.
Your benefit amount will be left unharmed if you can postpone filing until full retirement age. And if you can postpone even longer, your benefits will grow 8% per year up until the time you reach age 70.
Retirement Mistake #12: Not Having a Current Will
As you probably know, it’s your responsibility to dictate who will inherit your assets. If you don’t, your home state will make the decisions for you. Having a will is your opportunity to intervene and make these decisions, including who will raise your kids if they’re under 18. Make sure you have a will that’s current, and be sure to update it after marriages, divorces, births, and deaths.
Retirement Mistake #13: Falling Prey to Frauds and Scams
Retirees are the most targeted group when it comes to financial fraud. Theft of retirees’ identities, tax returns, credit, and even social security benefits is rampant in today’s world. Keep an eye on your credit reports, and be skeptical about responding to emails, phone calls, and text messages from people you don’t know.
Retirement Mistake #14: Cashing Out of a Pension Too Soon
Much like social security, your pension benefits usually accumulate the longer they sit in a retirement plan. Some retirees are pressed to withdraw their pension benefits early, for the allure of investing in higher growth opportunities. Remember that cashing out early and capping your benefit accumulation is a risky move.
Retirement Mistake #15: Not Updating Your Retirement Plan
If there’s one certainty to retirement planning, it’s that reality never unfolds exactly according to plan. But that doesn’t mean that planning is a fruitless exercise. Creating a plan for anything is extremely helpful. Even if it’s not 100% accurate, being just partially correct is a helpful way to bolster your decision making and improve the eventual outcome.
Retirement plans are also not a one-time, set it and forget it document. They are living, breathing things, and must be updated over time as your life unfolds. You don’t want to be making financial decisions based on a financial plan from 2002, do you? I’m guessing you want to use the most current information about your finances and investment performance. The only way to do this is to update yours consistently over time.
Retirement Mistake #16: Supporting Adult Working Children
Today’s typical college graduate finishes school with a massive amount of student debt. And to help their kids get off on the right foot, many parents choose to let them stay at home and save money in order to pay off debt sooner.
This can be a wonderful gift to your kids, but don’t let it mutate into an unhealthy reliance on your support. Not only will your children be unprepared for fare for themselves, it can sap your hard earned retirement savings. Remember – the best thing you can do for your kids is maintain your own financial independence.
Retirement Mistake #17: Being Socially and Physically Inactive
Staying mentally and physically healthy is extremely important once you make the transition to retirement. It’s also just about the best gift you can give to your family and friends. Staying active will keep you sharper, happier, and more independent in the long run.