The Major Retirement Preparation
Much is out there about the classic financial mistakes that plague startups, family businesses, corporations, and charities. Aside from these blunders, some classic financial missteps plague retirees.
Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet, whether they result from ignorance or fate, we need to be aware of them as we prepare for and enter retirement.
Timing Your Social Security. As Social Security benefits rise about 8% for every yearyou delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Meanwhile, if you can delay claiming Social Security, that positions you for more-significant monthly benefits.1
Underestimating medical bills. In its latest estimate of retiree health care costs, theCenter for Retirement Research at Boston College says that the average retiree will need at least $ 4,300 per year to pay for future health care costs. Medicare will not pay for everything. That $ 4,300 represents out-of-pocket costs, which includes dental, vision, and extended care.2
Taking the potential for longevity too lightly. Actuaries at the Social SecurityAdministration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer.3
Withdrawing too much each year. You may have heard of the “4% rule,” a guidelinestating that you should take out only about 4% of your retirement savings annually. Many retirees use it as one guideline for retirement income.
So, why do others withdraw 7% or 8% a year? In the first phase of retirement, people tend to live it up; more free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.
Ignoring tax efficiency. It can be a good idea to have both taxable and tax-advantagedaccounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its “preferred domain.” What does that mean? It means the taxable or tax-advantaged account that may be most appropriate for it as you pursue a better after-tax return for the whole portfolio.
Many younger investors chase the return. Some retirees, however, find a shortfall when they try to live on portfolio income. In response, they move money into stocks offering significant dividends or high-yield bonds – something you might regret in the long run.
The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due, plus your original principal, barring default by the issuer. Investments such as high-yield bonds that seek to achieve higher yields also involve a higher degree of risk.
Dividends on common stock are not fixed and can be decreased or eliminated on short notice.
Retiring with heavier debts. It is hard to preserve (or accumulate) wealth when youare handing portions of it to creditors.
Putting college costs before retirement costs. There is no “financial aid” program forretirement. There are no “retirement loans.” Your children have their whole financial lives ahead of them. Consider other alternatives before touching your home equity or your retirement accounts to pay for their education expenses.
Retiring with no investment strategy. An unplanned retirement may bring terriblefinancial surprises.
These are some of the classic retirement mistakes. Why not try to avoid them? Takea little time to review and refine your retirement strategy in the company of the financial professional you know and trust.