Retirement is one of the biggest financial transitions you’ll make in life. You go from earning income and growing your nest egg to depending on it and trying not to outlive it. And even though you’ve planned and saved for years, entering retirement is not a time to set autopilot. There are a few key decisions and actions that you still need to take care of to make sure things go as planned. Let’s take a look at 5 common mistakes retirees make (and what you can do to avoid them).
1. Overspending In Retirement
Do you know what you will do with your newfound freedom in retirement? Many people start by pursuing all the things they didn’t get to do while working—traveling the world, picking up a new hobby, remodeling their home, and the list goes on.
But many people underestimate the amount of money they’ll spend in those first few years of retirement. With so much extra time on your hands, it’s easy to make a lot of little purchases that add up to a lot over time.
If you want to avoid this mistake, create a detailed but realistic budget and stick to it. Yes, you can budget for extras such as a vacation or a new hobby, but make sure you know how it will affect your nest egg before you follow through with it. And be sure to work with your advisor to find a withdrawal rate that will stretch your money for as long as possible.
2. Underestimating Healthcare And Long-Term Care Costs
Retirees receive Medicare after age 65, but most of the time, this isn’t enough to cover chronic healthcare needs in retirement. For example, did you know dental, basic vision, over-the-counter medication, and long-term care are not covered by Medicare? (1)
The average person will spend $122,000 in out-of-pocket medical expenses from age 70 to death. Even worse, 5% of those over age 70 will pay over $300,000 and 1% will pay more than $600,000. (2) And when it comes to healthcare, the real retirement enemy often comes in the form of long-term care costs. More than half of people turning 65 will need some form of long-term care during their lifetimes, (3) but only 1 in 5 adults make the effort to finance their future long-term care expenses. (4) With average long-term care costs hovering around $275 per day or $8,365 per month for a private room in a nursing home, (5) it’s critical for you to have a plan in place to cover these expenses.
First, cautiously watch your spending in retirement to ensure there is a financial margin in place to protect you when larger medical bills hit later in life. And when choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. Finally, explore your long-term care coverage options, such as traditional long-term care insurance, life insurance with a long-term care rider, and annuities with long-term care riders. The earlier you get coverage, the better, since the older you get, the higher your cost for a long-term care insurance policy will be and the greater the likelihood of your application being denied.
3. Overreacting To Stock Market Volatility
Retirees tend to want to play it safe in the stock market. They want to invest on the conservative side and protect their nest egg as much as possible. But when you play it too safe, your savings can’t keep up with inflation and you end up losing money down the line.
Since your retirement may last anywhere from 20 to 30 years—as much time as you’ve spent in the workforce—don’t get caught up in investing too conservatively just to avoid short-term volatility. When your portfolio is too conservative, inflation becomes the biggest threat to your assets.
4. Claiming Social Security Too Early
Don’t assume it’s best to start collecting Social Security at age 62 (or at full retirement age, for that matter). If your full retirement age is 66, for example, you could receive a 32% increase in monthly benefits by waiting to collect Social Security until age 70. (6) This means if your standard benefit amount is $1,500 per month, you could receive $1,980 by waiting four more years. This equates to thousands of extra dollars over the course of your retirement.
When deciding when you should start collecting Social Security, consider the size of your nest egg, your retirement date, and the current state of your health. Calculating when to claim your benefits is both an art and a science. If you need help, reach out to a trusted financial advisor who can help you run the numbers.
5. Miscalculating Taxes On Retirement Income
Your retirement accounts are all taxed differently. If you don’t have a strategic withdrawal plan in place, you could end up with a large tax bill at the end of the year. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability.
Speak with a financial planner or tax advisor about creating a tax-efficient distribution strategy for retirement. This professional can look at your tax bracket, retirement accounts, and Social Security to help you withdraw money in the most tax-efficient way.
How We Can Help
It’s impossible to go through life without making mistakes, but at Bridgelight Financial Advisors, we are uniquely qualified to help you manage your wealth and avoid these costly mistakes in retirement. We help with everything from making a realistic budget you can follow to creating a tax-efficient distribution plan that keeps more money in your pocket. To learn more about our services, call (203) 795-7080, email Advice@BridgelightAdvisors.com, or schedule an appointment online!
About Bill
Bill Leavitt is the president of Bridgelight Financial Advisors, an independent, privately owned financial advisory and financial planning firm. He specializes in working with pre-retirees, retirees, professionals, and women investors, helping them navigate a complicated and ever-changing investment landscape. With over 25 years of experience, Bill serves his clients using his own unique financial planning model, The Wealth Focus™ Process, where he helps clients develop their customized long-term wealth strategy in four comprehensive steps. A Connecticut native, Bill resides in southern Connecticut with his wife, Laura, and their three daughters. To learn more about Bill, connect with him on LinkedIn.
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(1) https://www.cnbc.com/2019/04/02/health-care-costs-for-retirees-climb-to-285000.html
(2) https://www.nber.org/papers/w24599
(3) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed
(4) https://www.advisortoday.com/2017/10/26/ltc/
(5) https://www.genworth.com/aging-and-you/finances/cost-of-care.html