Why are they made again and again?
There are some classic financial missteps that plague retirees. Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.
Not maximizing Social Security.
The full retirement age for many baby boomers is 66. As Social Security
benefits rise about 8% for every year you delay receiving them, waiting a few
years to apply for benefits can position you for greater retirement income. Married couples have even more options.1
Roughly 40% of us retire earlier than we want to; about half of us apply for Social Security before full retirement age. Still, any way that you can postpone applying for benefits will leave you with more SSI.1
Underestimating
medical expenses.
Fidelity Investments says that the typical couple retiring at 65 today will need
$240,000 to pay for their future health care costs (assuming one spouse lives
to 82 and the other to 85). The Employee Benefit Research Institute says $231,000
might suffice for 75% of retirements, $287,000 for 90% of retirements. Prudent
retirees explore ways to cover these costs – they do exist.2
Taking the potential
for longevity too lightly. Are you 65? If you are a man, you have a 40% chance of
living to age 85; if you are a woman, a 53% chance. Those numbers are from the
Social Security Administration. This doesn't account that married people live even longer on average. Planning for a 20- or 30-year retirement isn’t
absurd; it may be wise. The Society of Actuaries recently published a report in
which about half of the 1,600 respondents (aged 45-60) underestimated their
projected life expectancy.3
Ignoring tax
efficiency.
When both taxable and tax-advantaged accounts are held, you want to assign
that or that investment to it “preferred domain” – that is, the taxable or
tax-advantaged account that may be most appropriate for that investment in
pursuit of the entire portfolio’s optimal after-tax return.
Avoiding market
risk.
The return on many fixed-rate investments is woeful these days. Equity investment does invite risk, but the reward
may be worth it.
Putting college
costs before retirement costs. There is no “financial aid” program for
retirement. There are no “retirement loans”. Your children have their whole
financial lives ahead of them. Try to refrain from touching your home equity or
your IRA to pay for their education expenses.
Retiring with no
plan or investment strategy. Many people do this – too many. An unplanned
retirement may bring terrible financial surprises; retiring without a plan leaves decision making to emotion. Not good.
To Your Prosperity,
Kevin Kroskey
This article prepared in conjunction with Peter Montoya.
Citations.
1
– moneyland.time.com/2012/04/17/the-7-biggest-retirement-planning-mistakes/ [4/17/12]2 - money.usnews.com/money/blogs/planning-to-retire/2012/05/10/fidelity-couples-need-240000-for-retirement-health-costs/ [5/10/12]
3 - www.forbes.com/sites/ashleaebeling/2012/08/10/americans-clueless-about-life-expectancy-bungling-retirement-planning/ [8/10/12]
4 - www.post-gazette.com/stories/business/personal/shop-smart-avoid-seven-common-errors-in-retirement-plans-635633/ [5/13/12]