Retirement is a glorious place to be. All of your hard work, saving and investing has paid off, and now you’re living the good life. Cheers to happiness during this new phase of life!
With all of the joy and ease, however, there are still some critical financial pitfalls to keep in mind as the days, months and years go by.
To make the most of your retirement, be on guard against these 10 common financial mistakes:
1. Not giving personal spending the attention it’s due.
While we have little control over the market, we have all the control over how we spend (and save) our money. It pays off big time to make a budget, stick to it, and avoid unnecessary debt, like paying for lavish vacations on credit. Remember, borrowed money comes with a price, and interest adds up.
THE FIX: Sit down with pen and paper and create a realistic budget. You could start by outlining your core expenses (like home, food, transportation, etc.) and your desired discretionary expenses (like vacations and other treats). Revisit your budget often to make sure you’re still on track. There are also services online, like Wela and Mint, that will help you track expenses so you know where your money is going, and where you may need to make changes.
2. Electing to take your Social Security benefits too early.
Sure, you may be eligible to begin taking Social Security (SS) benefits at age 62, but should you do that? A lot of folks rush to sign up to get their monthly check because it’s a reliable stream of income. But remember, under this option, your monthly benefit is reduced by about 25% versus the full retirement age of 66. The flip side is that if you delay to age 70, then your benefit could rise by 32% over the age 66 benefit amount. I’ve found that the decision to start SS is a highly emotional one – you’ve paid into the program, and you want your benefits. But, take a moment to look at your options.
THE FIX: Consider dipping into other financial assets if it will allow you to defer taking SS. This decision could mean spending down part of your nest egg first, but if you have enough money saved the wait could be worth it. Look at your global retirement picture: the assets you currently have, when you want to stop working, and your health. Also, consider the effect on your spouse. If, for example, the higher earner defers SS benefits, he or she is, in essence, purchasing a life insurance policy their spouse, as the survivor will get that benefit. Deciding when to begin drawing your monthly check may seem straightforward, but, as with any retirement planning decision, there are pros and cons and multiple strategies. Educate yourself or work with a professional to make the best decision for your unique situation.
3. Acting too quickly on investment advice from friends and family.
These days, it seems that family, friends, coworkers, and cocktail party acquaintances all want to dole out advice on how to manage money “the best way.” Sure, everyone wants to make money. But not everyone has the same goals or has the same road to travel to wealth creation.
For example, “John” is age 40, and has a ton of resilience. He can stomach 25% ups and downs because he’s consistently adding money into his portfolio – he can roll with the punches. Now, “Joyce,” age 70 and retired, doesn’t have that same level of resilience. She may feel uncomfortable if her investments drop just a few points. So, advice from their family member Jim might fit one but not the other.
THE FIX: Understand your unique circumstances and goals, and then work with a trusted certified financial planner who can look at your big picture with you.
4. Overlooking a tax-efficient retirement distribution strategy.
Many people simply aren’t aware that every retirement account is taxed differently. So, you could end up paying more in taxes than necessary if you don’t have a tax strategy to taking your distributions.
THE FIX: A good way to plan on your own is to generally tap your least expensive assets first. These are the investments that are non-taxable, to begin with, or that aren’t earning much in interest or growth. But don’t completely deplete any one resource. Instead, make your 401(k), a traditional or Roth IRA, savings or other accounts all work for you.
Of course, the best way to ensure that your distributions are “tax-smart” is to consult with a financial planner and a tax advisor. These professionals can help you determine your tax bracket, and can then analyze your “buckets” of assets to decide the most tax-efficient plan for taking distributions.
5. Spending too much on your house.
Are you house-rich but cash poor? Is your house will be worth more than your retirement accounts? If so, you may want to consider downsizing. I’m amazed that some folks spend as much as 40% – 50% of their income on their shelter. I realize the real estate industry touts this number as safe, but I’d much rather see folks keep their housing cost down around 15% – 25% of their budgets.
THE FIX: Again, consider downsizing. After all, if you’re retired, do you really need that four-bedroom house? And you can use the profit you keep from selling your home to bolster your retirement accounts.
6. Giving your adult children too much financial support.
Of course, it’s difficult to keep the desire to help your children in check. Maybe they need help making ends meet for right now, or maybe they would like to buy a house but are a little short on the down payment. No matter the circumstances, retirees need to remember that they cannot replace their money, while their adult children – who are (hopefully) working – can earn money to cover unexpected expenses.
THE FIX: Talk to your children about your financial situation to put a stopgap in their expectations. Say, “We can’t support you because we’re supporting us.” It’s a critical conversation to have because not only will supporting them affect your bottom line; it can affect your happiness, too.
In my survey, the unhappiest retirees responded that they still support adult children. The unhappiest families averaged over $700 per month in support of their kids, while happy retirees at least kept the funds to under $500. At the extreme, a family supporting adult children at over $2,000 per month was more than 400% more likely to be unhappy than a family with fully financially independent kids. If that’s not incentive to tough love your kids into self-sufficiency, I don’t know what is.
7. Not budgeting for changing expenses during retirement.
During retirement, many expenses go down – no longer will you have a commute or be expected to show up for work in a suit and tie. But other costs will increase. According to a recent Fidelity study, health care will cost approximately $220,000 over the course of retirement. Why such a large number? There are two factors at play here: your individual health costs are likely to get higher as you age, and the cost of care is expected to continue to rise. Alongside health care, the cost of long-term care is rising, too. In 2008, the average rate for a private nursing home was almost $68,000 per year, but in 2013, it was just under $84,000.
THE FIX: Create a realistic retirement budget. Make a line item for health care, and be honest about how much you may need to spend on Medicare copays or on COBRA, depending on your age. Take into account prescription medications. Plan for financing long-term care, even if you never need it. (Remember, Medicare doesn’t cover long-term care costs.) Your financial planner can help you put some real numbers into your budget to allow for these unknowns, making you more prepared for whatever may come your way.
8. Letting taxes take up more real estate in your mind than returns on your investments.
I’ve met some retirees that are so focused on saving on taxes that they don’t adequately consider the returns on their investments. Usually, these folks have ended up with assets like tax-free bonds that don’t even allow them to keep up with inflation. I’ve seen this even when people are in the lowest tax bracket.
THE FIX: Make a realistic assessment of your tax bracket. Then, talk with your tax advisor and a financial advisor so you can develop a plan to invest and withdraw your money with the greatest return and the least tax liability. It’s a win-win.
9. Not having an estate plan in place.
As unpleasant as it is for most people to think about, it’s worth the emotional, financial, and time investment to work with an estate planning attorney to get a few key documents in place. If you don’t have a will, for instance, then the laws of the state you live in determine where your legacy goes – not you. In addition to potential inter-family strife and court proceedings, there could also be tax consequences for failing to plan adequately.
THE FIX: Work with a lawyer to draft some basic documents: a will, financial power of attorney and advance directive for health care. This way, your wishes are outlined as you direct, in plain black and white.
10. Having very different approaches to investing and spending from your spouse.
Are you fairly risk-adverse while your spouse is more aggressive in their investment strategy? Or, are you thrifty but think your spouse is a spendthrift? Both are equally important imbalances to address in your marriage. That’s because not being on the same page can throw off your retirement financial wellbeing, and your marriage wellbeing along the way.
THE FIX: If you and your spouse continue to disagree, you may want to find an objective third-party financial professional to help the two of you work together more closely. And, you wouldn’t be alone in doing so. According to a survey conducted by research firm Cerulli, in households with $250,000 or more in investable assets, 44% say they “rely” on a financial advisor, while 22% use an advisor for special events. Only 34% of investors (less than half) go it alone. So, consider joining the crowd and getting on track with your spouse.