It’s not uncommon these days for retirement to last as long (if not longer) than our working careers.
That means it’s critically important to make the right decisions because a few mistakes or missteps could eat into our retirement savings. And that’s a problem since most of us haven’t saved enough to begin with. Nearly a quarter of American workers said they have less than $1,000 saved for retirement, according to a report from the Employee Benefit Research Institute. Nearly half of those surveyed said they had less than $25,000.
With that in mind, here are five mistakes retirees and pre-retirees often make. And suggestions on how to avoid them.
- Not having a guaranteed stream of income. Reid Abedeen, managing partner at Safeguard Investment Advisory Group in Corona, California, says a guaranteed stream of income in retirement is a must. That would be regular income that you can count on coming, whether it’s monthly, quarterly or annually. It includes things like pensions, Social Security and annuities*.
“Not having a (guaranteed) income stream can derail everything else,” he says. “If I don’t have that consistent income stream, I’m having to sell if the markets are down. I don’t have the luxury to hold out. That can derail my investment plan. It’s very important you have a balanced approach.”
*Annuities are long-term insurance products that can provide a guaranteed income for life. They may be subject to surrender charges and holding periods. Guarantees are backed by the financial strength and claims paying ability of the issuing company.
- Taxes are often the last thing on the mind of retirees. To forget the impact of taxes can be a damaging financial mistake. For example, people often forget that retirement savings in an IRA or 401(k) are tax-deferred, not tax-free. The government encourages you to save, but taxes must be paid when you begin to withdraw the money. In fact, the purpose of Required Minimum Distributions is to ensure that savers begin taxable distributions within their lifetimes. That’s also why people convert to ROTH IRAs to lessen the impact on taxes in retirement.
“Not having a strategic plan to keep you taxes under control is a mistake,” says Abedeen. “A lot of people now should consider doing Roth conversions. Because of the tax overhaul, you have an advantage to do to conversions.”
Note that such a conversion is a taxable event. It’s generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.
- Having debt under control when you retire is a must. “Making sure your expenses are under control within your game plan is important,” says Abedeen. “That can wreck anything. We know successful stars and athletes who have made tens of millions only to go bankrupt. It had nothing to do with assets. It had everything to do with expenses and debt. Being realistic on that will let all the other components of your financial plan work. They are all connected.”
- Underestimating health care costs, especially insurance. “When people retire before 65, they come in and say, had I known that it would cost, I don’t know that I would have retired,” says Alicia Lewis, co-founder of Layman Lewis Financial Group in Loveland, Colorado. “The lesson is if you don’t have a plan, it can cost you a lot of money.”
People often overlook the impact of health care when they retire early. For example, if you retire at 62, you are not eligible for Medicare until you reach 65. That means you are no longer covered by your company and if you are not covered by a spouse, you must go to the open market to get health insurance, and that can be expensive. According to AARP the average cost of premiums for people 50 to 64 is $6,428 a year, two and a half times more expensive that it would cost for employer coverage. It can be more or less, depending on the state of residency, the insurer and the health of the person insured.
“Neglecting to look at that, it will be an expensive cost to them until they are 65,” says Lewis. “The lesson is if you don’t have a plan, it can cost you a lot of money.”
- Not seeking the advice of a financial professional. “Another thing that can wreck someone’s retirement is if everything around is changing and your game plan is the same,” says Abedeen. “Now, your potential for mistakes increases.”
Abedeen says it’s important to find a qualified professional who can take a look at your goals and help provide solutions to your needs. “Your lifestyle and needs will change. The stock market will change. The political environment will change. Having someone go through that game plan quarterly to maintain it and have it updated, is just as important. Another thing that can wreck someone’s retirement is if everything around is changing and your game plan is the same, now your potential of mistakes increases.
“Look how Blockbuster Video went out of business.,” he says. “They were very successful in the 90s. They refused to change when the other models came out. The environment around it was changing, they didn’t.”
It’s just as important to work with qualified financial professionals, says Lewis. “If they haven’t been, before anybody pulls the trigger on retirement they need to be talking to a retirement specialist. People say I talked to advisors and they say it is all the same thing. They are working with an accumulation specialist. You are not in accumulation years any more. You want to be concerned about preservation.
“When you are working with an accumulation specialist, that can lead you down a road of harm,” she says. “Their number one thing they say is sit back and (the market) will come back. In retirement, you don’t have the time for it to come back. You don’t have 40 years. You are using that as income. We live in a world of specialist. If you go to family practitioner, they say your heart is beating fast. They will send you to a cardiologist. In retirement, you need to work with a retirement specialist.”
It’s important to understand that financial professionals can mean insurance agents, investment advisers, Registered Representatives, tax professionals, and/or legal professionals. There is also not a single designation, license, or registration that makes someone a “retirement specialist.” Make sure you understand the qualifications of the professional(s) you are working with.
This article is for informational purposes only and is not intended to provide any specific financial advice.