There’s a reason I advise readers to talk to a financial professional well before they retire. There is so much more to retirement than saving money, and many Americans can’t even do that.
There are a lot of things to consider, foremost among them how long that nest egg will last so you don’t want to run out of money; when to take Social Security; how to use Medicaid and much more.
I could go on, but by now you should get the point. Retirement is not easy, and you need to take advantage of any help you can get.
Which brings me to a subject I often write about. What are the biggest mistakes people make in retirement? There are a few that constantly pop up when I talk to Certified Financial Planners® and financial professionals. Among them:
- Failure to have a financial plan
This mistake tops the list of nearly every financial professional I’ve talked to. Planning is key for anyone to have a financially successful retirement that they can feel confident in.
“In this day and age you have to plan,” says Dawn-Marie Joseph, president of Estate Planning & Preservation in Williamston, Mich. “It’s a big thing. It’s a lot different than just five or ten years ago.”
Joseph says in Michigan many people had parents and grandparents who worked for General Motors. They were used to being taken care of in retirement, whether through steady pensions on generous retirement health care benefits. The same can be said for state and local government workers. But things are changing.
“Those benefits are not there what they used to be,” she says. “I see a lot of state workers and General Motors workers. People expected to be taken care of. It was big eye-opener when (GM and the state) cut services. People who work for the state of Michigan see their health services cut every year. They weren’t’ prepared.”
- Underestimating inflation
People forget to plan for inflation. They often forget that in retirement they are on fixed income, which means if their retirement funds aren’t at least keeping pace with inflation, they could take a hit.
“People overlook inflation and what things will cost when they retire,” says Joseph. “Cars are so expensive. If you haven’t’ bought a car in 10 years, you don’t realize the price.”
- Not figuring out how to turn that nest egg into income
“It’s a correctable one,” says Brian Singer, at Singer Financial in Brownsburg, Ind., “but a lot of people feel like that portfolio they have will automatically turn into a paycheck in retirement. The reality is something has to happen for that cash flow to be generated.
Singer says retirees can get into trouble when they are 100 percent invested in the stock market and start to make withdrawals without having a discussion with a financial professional about which insurance products to consider purchasing, like an annuity, to generate a steady source of income.
“If you are do-it-yourselfer and don’t get feedback from a financial person, that becomes a big mistake. You have to take that nest egg and create income.”
- Not planning for medical expenses
Fidelity Investments says in a report that a 65-year-old couple that retired in 2016 will need $260,000 to cover health care costs in retirement, up 6 percent from 2015 and the highest since Fidelity began calculations in 2002.
Fidelity also looked at the costs associated with long-term care, which it says could impact 7 in 10 Americans who reach 65 in the next five years. Fidelity estimates that a 65-year-odl would need an additional $130,000 to insure against long-term care expenses.
“You don’t’ have a choice these days,” says Joseph. “You have to have health care, and Medicare is not enough. That’s a big part of planning.
She says that her clients don’t realize how big a cost health care can be in retirement until she starts asking questions. “I go over how much I pay a month,” she says. “I don’t expect when I retire for those costs to come down. Right now I pay $730 a month for health care. I used to pay over $1,000. I show them those numbers and then do an annualized number. Medicare will save me little money, but I now I have to set aside money. That’s a lot of money.”
- Tax planning
This is something many people just don’t think about. Amongst the most common mistakes is not planning for tax-free income in retirement, Singer says.
Here’s why: Most people forget that money went into their traditional 401(k)s and IRAs tax-deferred – not tax free. If all your savings is in those accounts, you probably didn’t think about the fact that taxes will be due when you make withdrawals. For example, if you need $50,000 for a down payment on a retirement home, you will probably need to take out an additional $15,000 to $20,000 just to cover federal and state taxes. If you have a ROTH IRA or 401(k), you have already paid taxes on the money and you have the flexibility to withdraw just what you need.
“The tax thing is not something you can wave a magic wand over and can fix,” Singer says. “You can takes steps over time to create tax efficiency. More and more there are opportunities in 401(k) plans to put after tax dollars into a ROTH.
“People are reluctant to do that because they want the deduction,” he says. “But you can put up to $24,000 in ROTH. The strategy is important because it becomes significant tax free discretionary fund.”
“I encourage (clients) to ask their employer if they can do that. It can be a great opportunity for some people, depending on their individual situation”
It’s also important to remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. As always, you should consult with a qualified tax advisor before making any decisions regarding your IRA.
By contacting RetirementHQ, you may be offered information regarding the purchase of insurance products. All of our financial professionals are licensed insurance agents. Additionally, some individuals may also be registered with a broker/dealer or as an investment adviser. Our financial professionals do not offer estate planning, tax or legal advice. Always consult with a qualified advisor concerning your own situation.