Don’t Let These 10 Mistakes Ruin Your Retirement

Retirement Mistakes to Avoid

As a financial planner I see many retirees make smart financial decisions and others make unfortunate, avoidable mistakes. Below is my list of the top 10 retirement mistakes to avoid.

1. No Retirement Plan

Does a pilot fly solo or does he or she have a plan? A retirement plan helps determine how much you can sustainably spend in retirement, how to tax-effectively withdraw money from retirement accounts and when to claim Social Security. These items all go into a retirement or financial plan that helps you determine if you’ll reach your goals. For many, the plan provides them peace of mind. Once the plan is complete you are not done as you’ll need to monitor your progress and update it for material life events. Here is an article about the importance of financial planning.

2. Claiming Social Security Too Early

Individuals can typically claim Social Security between the ages of 62 and 70. There is a large benefit to waiting as your annual income increases by 6.5% to 8.0%, before inflation, depending on your age and when you claim. That said, the Center for Retirement Research found that approximately 48% of women and 42% of men sign up at age 62. This lower benefit impacts retirees and their spouses for the rest of their lives, especially considering many are living longer than expected.

3. Failing at the Social Aspect of Retirement

Did you know that divorce and suicide rates spike among the recently retired? Many people retire from something (i.e. their job) and not to something (the next phase in your life). I recommend that individuals near retirement think about what they’ll do next and write down a typical day. What will you wake up for? Not planning is one reason I see many recently retired individuals returning to the workforce. (For related reading, see: A Pre-Retirement Checkup.)

4. Missing Tax-Planning Opportunities

Annual tax planning in retirement can save you thousands over your lifetime. This includes maximizing tax brackets by figuring out which retirement accounts to withdraw from and how much. Completing Roth IRA conversions, gifting strategies, realizing capital gains at 0% tax rate or if charitably inclined, completing qualified charitable distributions (QCD). Tax planning should be done during the year and not when you file your taxes.

5. No Investment Strategy

Do you blindly pick your investments based on what has done well lately? For people near or recently in retirement your biggest investment risk is called the sequence-of-return risk. This is the order of investment returns as a material stock market drop (2008) can impact your ability to reach your retirement goals. What should you do? Keep liquid, safe assets to cover five to seven years in expenses and the rest should be in growth investments to keep up with inflation. Your short-term risk is a bear market, but your long-term risk is inflation. Not sure how to do this? Maybe it is time to work with a professional.

6. Not Evaluating Healthcare Insurance Options

For recent retirees healthcare is a material expense in retirement. For those retiring before age 65, did you evaluate COBRA, the healthcare exchange and how the premium tax credit works? For those retiring at age 65 or later did you adequately review all your Medicare options with a qualified professional? Does a Medigap or Medicare Advantage policy make the most sense for your situation? A poor healthcare decision can have a material negative impact in retirement. (For related reading, see: 7 Ways to Reduce Healthcare Costs in Retirement.)

7. Underestimate Life Expectancy

If you are 65 today and married there is a 47% chance one of you will live past 90. Have you planned for 25+ years of retirement? Longer life expectancy due to technology and improved medicine has a material impact to your retirement plan. It impacts your investment strategy, timing of claiming Social Security/pension, sustainable annual spending and many other factors.

8. Fail to Consider Cognitive Decline as You Age

You may feel great when you retire and comfortable handling your finances, but your cognitive ability will likely decline over time. Will you continue to be able to make smart financial decisions as this happens? A study in Britain found the memory and other brain capacity begins to decline at the age of 45, with the biggest drop between age 65 and 70.

9. Don’t Communicate With Spouse About Finances

Does one spouse take the lead when dealing with all matters financial? What would happen if that spouse would pass first? Would the surviving spouse be able to deal with the grief from the loss of the loved one and ongoing financial matters? It is important to communicate with loved ones regarding your financial situation and location of key documents. (For related reading, see: Estate Planning for a Surviving Spouse.)

10. Underestimating Inflation

Older Americans are disproportionately affected by inflation due to higher cost increases in healthcare compared to other categories. A thousand dollars of monthly income today will be worth significantly less in 20 to 30 years. Therefore, it is important to remain invested in assets that grow with inflation.

You’ve worked hard for retirement so now is the time to enjoy it. Worried that you’ll make one of the errors above? I recommend contacting a fee-only financial planner to help you avoid a big mistake and make smart financial decisions.

The podcast version of this blog post can be found here.
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