I often tell my children, “today ain’t no dress rehearsal!” The same could be said to people who are approaching retirement or recently retired. At Sterling Retirement, we call this the “red zone.” There are no second chances to get it right, and mistakes can be costly. So let’s look at the top eight mistakes to avoid, both during and after retirement.
1. Collecting Social Security too early. Often we see people drawing Social Security early without first considering drawing on investment accounts or other assets to generate income. Half of all Americans don’t wait to reach their normal retirement age (66 or 67 under current law) before collecting Social Security. Collecting Social Security too early not only eliminates the opportunity for a higher benefit in the future, but also reduces the benefit for survivors.
2. Underestimating expenses in retirement. Many people believe that they will spend less money in retirement than they did while working, figuring they won’t have to pay for the daily commute, work wardrobe, lunches, etc. That is typically an inaccurate prediction, especially in the early years. Most people actually spend more money in retirement than they did when they were working. In retirement you often have 24/7 to shop, travel, and have fun with hobbies and interests that you did not have as much time for before. Retirement, to many of our clients, means that “every day is Saturday.”
3. Lacking tax diversification among investment and retirement accounts. In retirement, the name of the game is creating tax-efficient income. It’s helpful to have several kinds of accounts; from taxable (non-retirement) accounts to tax-deferred accounts (401(k)s and traditional IRAs) to tax-free (Roth IRAs). This allows for the most flexibility when creating a paycheck in retirement. Recently, a prospective client who was on the verge of retiring came to see us with a sizable amount in his retirement account, but no other assets. Not only does that make his retirement income stream fully taxable, it will subject his Social Security benefits to higher taxation. It pays to consult a financial adviser to create a tax-efficient portfolio before beginning to take retirement income.
4. Not preparing psychologically for retirement. Many people think of what they do as who they are. It can be difficult to let go of that identity. I have seen a number of people become bored and even depressed once retired, as they do not have hobbies or interests to keep them engaged. This can put a strain on marriages. Couples may have different views on what retirement will entail, and are not used to spending so much time together. For many workers, the workplace is their social outlet. Retiring too early may unintentionally cut you off from this social outlet. If you’re fortunate enough to retire early, the co-workers you rely on for a social life may not be able to do so. So you have to ask yourself, who are you going to hang out with?
5. Retiring too soon. Staying employed a few extra years can boost your retirement income by a third or more because it lets you avoid tapping savings right away and delay taking Social Security benefits, which increase 8 percent for every year you wait after your full retirement age.
6. Not working with a certified financial planner who will view your financial life holistically. Investments alone do not truly secure your financial future. If you’re getting ready to retire, you need to think about other things, such as ensuring you have an adequate savings reserve for emergencies, adequate life insurance, a plan for charitable giving, boundaries for contributing to a mortgage as a percent of your income, etc. It isn’t as simple as having investments in your 401(k) to secure financial freedom and confidence.
7. Not taking advantage of 401(k)s or self-employed retirement plans. If your company offers a 401(k) plan and you’re not contributing, you’re making a huge mistake. Contributions to your 401(k) come out of your paycheck before taxes, meaning it’s a portion of your income that you won’t pay taxes on now. And many employers have a match program. This is free money; you should take advantage of it.
8. No intentional plan to cover health care and long term care costs. People are living longer, so they will need to have health care coverage, but many underestimate their out-of-pocket costs. Many people think Medicare will cover all their medical expenses. It doesn’t; payment depends on the type of treatment. It also doesn’t cover dental, vision and hearing. Many health care experts suggest that a couple age 65 throughout retirement will spend $250,000 to $300,000 on health care. And that doesn’t cover skilled nursing.
Just like in the game of pool, you want to avoid the 8-ball. Avoiding these eight mistakes while in the “red zone” is necessary for financial success in the game of life.
Megan E. Gehrman, a certified financial planner with Sterling Retirement Resources, contributed to this article. For a complimentary consultation about your retirement, contact Steven Finkelstein at 952-224-7161 or firstname.lastname@example.org, or visit www.sterlingretirement.com.