Burning Through Your Retirement Savings
If you saved a lot for retirement, it might feel like the ultimate payoff to stop working and gain access to your funds. Dont let all that cash fool you into living the high life early on in retirement, though.
Sure, the first years of retirement might be the best time to travel, do home projects and spend money on things you might not be able to enjoy later on. But its important to spend your retirement savings modestly, as you dont know how long youll need those funds to last.
Failing To Account For Health Care Costs
Health care costs are arguably the greatest expense you will face in retirement and those costs are continuing to rise.
A dangerous mistake retirees make is failing to understand the staggering amount of money they may have to spend on health care in retirement. Consider an example: CNBC estimates that a healthy 65-year-old couple would realistically need to budget nearly $400,000 to cover health expenses in retirement.
The good news is that Medicare can and does cover much of this burden, but gaps exist in the coverage. One prudent strategy is to look into other insurance options, like Medicare Advantage and/or Medigap plans. Medicare Advantage plans offer expanded coverage beyond whats offered by Original Medicare, and Medigap can help to cover many of the additional costs associated with health care for older individuals.
Another major cost new retirees dont always plan for is long-term care. While the decision may seem far away, Medicare does not cover extended nursing home or assisted living facility stays. If you reach the point where you need to leave your home, the expense of doing so will fall entirely on your shoulders. The earlier you plan for these costs, the more likely you are to be financially ready for them.
Dropping Health Coverage In A Nursing Home
Most health insurance plans don’t cover room and board in long-term care and nursing facilities. But people entering such facilities still need insurance to help pay for medical supplies, doctors’ care, and hospital services while they’re in the nursing home and will have to pay out of pocket if they’ve dropped their coverage.
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Running Up Credit Card Debt
Although its important to build up a credit history, getting into credit card debt is a big money mistake.
When used like this it means you will always owe the credit card provider as interest and fees are designed to increase the debt. Its especially bad if you can only afford to pay back the minimum amount each month.
The best way to use a credit card is to only spend what you can afford to repay in full each month. That way you arent going to end up in debt forever. If you can build an emergency fund as well, that means you can use that to pay any unexpected bills instead of a credit card.
Keep Your Money In Your Pocket
The number one retirement planning mistake I see is people paying too much in taxes during pre and post-retirement. This happens most often in pre-retirement through missed deductions. Future retirees want to find out if their employers match 401k and 403b contributions and if they contribute enough to earn their companies maximum match. Those on high deductible health plans should also take advantage of a health savings account if its availab. These two deductions alone can set you up for success in pre-retirement.
On the post-retirement side, you want to develop a strategy around your taxable income. Traditional retirement accounts allow you to take deductions upfront and pay taxes later. This could potentially create an issue in retirement because with various forms of retirement income like Social Security and a pension, retirement account distributions could put you in a similar tax bracket as when you were working. Not to mention mandatory distributions kick in when you turn 72. One way to tackle this problem is to take the money out now at a lower and predictable tax rate and put it into a Roth IRA where the money can be withdrawn tax-free at a later date.
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Podcast: Lessons From A Volatile First Quarter
The war in Ukraine, lockdowns in China, rising inflation and talk of a looming recessionbad news bingo roiled markets through the first three months of 2022. In this episode of The Adviser You Can Talk To Podcast, Dan Wiener and Jim Lowell sit down to discuss what weve learned from one of the most volatile periods in recent market history, and they share their outlook for the rest of 2022. Topics include:
- Can inflation be tamed?
- Are bonds still a safe haven for investors?
- What long-term impacts will the Ukraine war have on the global economy?
- Is it time for U.S. investors to pull out of China?
Listen now, and dont forget to tune in to our quarterly webinar, Stocks, Bonds and the Fog of WarOur Investment Perspective, on Wednesday, April 20. Dan and Jim will explain our approach to navigating stormy markets and discuss how thoughtful risk management can enable us to pursue reasonable returns in both calm and turbulent times.
Rushing Into Home Ownership
Most people aspire to own their own homes. If you plan properly, then there is no reason why you cant buy your own home one day.
However, a mistake many people make is rushing into buying their first home. Societal expectations often put pressure on young adults to hit certain milestones by a certain age, including buying their first property.
Rushing into buying your first home can be a mistake if you are not financially stable. Homeownership involves many extra costs such as insurance, taxes, and maintenance. If you are just beginning your career, then you may not earn enough yet to comfortably cover all these costs and everything else you need to pay for.
Sometimes people rush into buying a home that is far more expensive than they can afford. The more you are spending on housing the less you can spend on paying down debts, other bills, and having cash left over to live on.
These mistakes can be avoided by making sure to avoid buying a property before you are ready. Make sure you can afford to buy the home and all the associated costs. Its also recommended you make sure not to spend more of your budget on housing than you can afford in other words, dont buy the most expensive property!
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Fail To Plan Plan To Fail
You would never plan a trip without knowing where your starting point is. So why do that when it comes to retirement planning and investments? A recent study showed that out of 6,300 Americans, half simply guessed a dollar amount when it came to knowing how much money theyll need for retirement. Only seven percent of the study participants opted to use a retirement calculator. For whatever reason, many future retirees put off doing the math on how much theyll need to live comfortably in retirement. Perhaps out of fear that the end goal is unattainable? But ignorance is not bliss! You have no chance of knowing where you stand without running the numbers and clearly planning for your future.
A great way to start the retirement planning process is through an investor policy statement. This guide establishes a framework for your portfolio by detailing your target asset allocation, which assets youre investing in, the investment timeframe, cash flow needs, and your system for maintaining these investments. Without an investor policy statement, youre essentially winging it. Buying and selling based purely on emotion rather than strategy. That will turn you into a collector of investments rather than a profitable investor. Having an investor policy statement means having a clear direction that helps you stick to your investments long-term. Listen to this episode for more retirement planning pitfalls to avoid!
What Do We Do As California Estate Planning Attorney Specialists
The lawyers and staff at CunninghamLegal help people plan for some of the most difficult times in their lives then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for California Estate Planning and Trust Administration. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call or book an appointment online.
Please also consider joining one of our free online Estate Planning Webinars.
We look forward to working with you!
Best, Jim
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Mistake #1: Forgetting To Assign Account Beneficiaries
One retirement mistake most people make is not assigning beneficiaries. Retirement plans allow you to add multiple beneficiaries. You can designate primary and secondary beneficiaries and set up a benefit split between them.
The next mistake they make is they assign the beneficiary but dont re-evaluate and update every year. Life and situation change every moment. Therefore, it is always wise to review your beneficiary yearly and update, re-evaluate and revise your choice.
Lastly, most people dont discuss their retirement plans with their beneficiaries. If something happens to the account holder, the retirement funds could go unclaimed.
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Retirement may seem a long way off and far removed from your day-to-day concerns. And yet, this is actually the best time to start planning and saving that is, when you still have time to accumulate the money youll need.
Here are some common mistakes that throw people off course in their retirement planning. Knowing these pitfalls should help you steer clear and save more.
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Having Unrealistic Expectations For Retirement
Consider the true costs of retirement and be honest about the following:
What kind of lifestyle you want Your travel plans Your business goals Whether youre planning on helping your children or grandchildren with expenses
Draft a retirement budget thats realistic and assess whether you need to make sacrifices now to achieve your future financial goals.
Common Retirement Mistakes To Avoid
Reaching retirement with a solid plan and ample money is no small feat. For most, it requires years of saving, investing and strategizing. Even if you execute it perfectly, retirement planning can be a marathon, and it can sometimes be hard to meet your savings goals. Here are nine common retirement planning mistakes and tips on how to avoid them.
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Mistake #: Thinking You Can Wait To Start Saving For Retirement
When it comes to retirement planning, people make the mistake of not starting early enough. No matter how much money you make, it would be best if you tried to start saving for retirement as soon as you start making money.
Even if you can only afford $5 a month, you should put $5 in your retirement account. The best time to start saving for retirement is as a teenager. The second best time to start is today.
Saving Too Much Too Early
If youre in your 20s and putting over 10% of your income toward retirement, you might want to slow down. Sure, youre setting yourself up for a comfortable retirement by saving aggressively at a young age. But if you arent putting money toward other goals, you might have to take on more debt to buy a house or buy a new car when your old one breaks down.
Ask Yourself: If You Plan To Retire in the Next 5 Years, Should You Just Do It Now?
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Not Planning For Health Costs
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved to cover health care expenses in retirement.
Stay healthy to lower that figure. Keep in mind that Medicare doesn’t cover all of retirement healthcare costs. Plan to purchase supplemental insurance or be prepared to pay the difference out of pocket.
Cashing Out Your Pension
Your financial advisor might try to convince you to cash out your pension from a former employer. Unless you really need the money now, this is mostly in the interest of your advisor, who could make tens of thousands in commission, according to Time Money.
According to the Pension Rights Center, you should consider a one-time, lump-sum payment from your employer if youre sick, your life expectancy is short or you dont have a surviving spouse that will need to rely on lifetime income. But generally, try to avoid cashing out your pension.
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At What Age Can I Start Receiving Social Security Benefits
You can start receiving Social Security benefits at the age of 62 however, you will receive reduced benefits at this age. You start receiving full benefits at the age of your retirement, which is based on the year you were born. Once you reach age 70, then your benefits would increase above the full amount you receive at your retirement age.
Paying High Retirement Account Fees
Be aware of how much youre paying in investment fees, including 401 fees. In 2014, the Center for American Progress estimated that a typical worker who starts saving at age 25, earns $30,502 and pays a 1% investment fee will end up spending nearly $140,000 in fees over his lifetime. A high-income worker making $75,000 at 25 years old will pay more than $340,000 in investment fees.
The promise of high yields is tantalizing, but compare these account fees with ones attached to lower-yield options to determine the true value of your investment. Watch out for the hidden fees youll encounter in retirement.
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Mistake #: Buying Too Much Of Your Companys Stock
If your employer’s stock shares are an investment choice in your 401, you may want to consider keeping your allocation to no more than 10 percent. Youre not being disloyal even the mightiest of companies think Enron and WorldCom can falter. With your salary already tied to your companys fortunes, you dont want a sizable part of your retirement savings to be similarly dependent.
Assuming Social Security Will Be Enough
Another error is assuming that the Social Security benefits you’ll receive in retirement will be enough to support you. In many instances, that’s just not the case. Consider this: The average Social Security retirement benefit was recently $1,411 per month, or only about $17,000 per year. Of course, if you earned more than average during your working years, you’ll collect more than that — but not necessarily a lot more. The maximum benefit for those retiring at their full retirement age was recently $2,788 per month — or about $33,000 for the whole year.
Savvy planners will find out what they can expect from Social Security and will incorporate it into their plans. You can get an estimate of your expected benefits from the Social Security website at www.ssa.gov.
Image source: Getty Images.
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Giving Up On A Career Path
A common situation that arises after graduation is that people cant find a job straight away or that there is little opportunity for promotion. As bills need to be paid many people stay in a job with little prospect of future advancement or higher earnings.
One result of this is that over their lifetime they will earn less than someone that builds a career in the professional workforce.
Getting a job in your chosen field may be difficult when starting out. There could be lots of competition, fewer roles available, or you may have to move to a new city or state. However, persevering with launching your career will mean your lifetime earnings will enjoy a significant boost.
Make sure not to give up on your career as one day the right opportunity might come your way.
Not Planning For Tax Implications
When implementing retirement planning its important to consider tax implications and what works best with your financial situation now and in the future.
What tax bracket will you fall into after you retire? Is it best to pay taxes on the front-end or when you withdraw? These are questions to consider and discuss with a tax advisor.
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Retirement Mistakes To Avoid At All Costs
Retirement mistakes abound, whether due to bad advice, improper planning, or just misconceptions about what retirement truly is for.
Here are some of the biggest retirement mistakes that people are making, according to financial experts. What is most fascinating is that the majority of them have nothing to do with finances, which should be an eye-opener for anyone planning for or nearing retirement.
Taking Social Security Early
The longer you wait to file for Social Security, the higher your benefit will be . You can file as early as age 62, but full retirement occurs at 66 or 67, depending on your birth year. If you can hold off, its best to wait until age 70 to file to receive maximum benefits.
The only time this does not make sense is if you are in poor health. Another consideration: If spousal benefits are an issue, it may be better to file at full retirement age so that your spouse can also file and receive benefits under your account.
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