Nearing retirement can be a stressful and confusing time, and it’s no wonder, since many of risks you will face as a retiree are not always evident. Ignoring these risks can has the potential of costing you a significant amount of money over the course of your retirement. But don’t panic; to help you address these risks, we’ve outlined five very common potential retirement mistakes that can dramatically affect your bottom line:
1. Taking Social Security Too Early
Social Security is complicated, and a haze of mystery and uncertainty floats around the future of the nearly 100-year-old program. Potential retirees voice many reasons for filing and collecting benefits at 62 before their full retirement age. “I’m going to take it before they [the feds] take it away.” “My parents died in their 60s, so I want it now.” “It’s my money, and I want it.”
While these may be understandable reasons for collecting benefits early, in many cases the risks of collecting early are not always apparent. The most obvious reason to delay taking payments is because filing early reduces your benefit amount for the rest of your life. If you file early and still generate earned income, you could be liable to pay added taxes on excess earnings.
Also, by collecting benefits early, you could be putting additional risks on your spouse. After one spouse passes away, the other spouse has the option to draw their deceased spouse’s benefit. So if you draw yours early, you won’t only be locking in a lower benefit for the rest of your life, but potentially for your spouse if you predecease them.
While it may make sense for some people to draw at 62, oftentimes there are alternative strategies that may increase your benefit without permanently locking you into a lower amount
2. Not Being Properly Insured
In 2013, Fidelity calculated that the average 65-year-old couple should allocate $240,000 for medical expenses in retirement. That number is in addition to Medicare and would cover additional costs, such as deductibles, drugs, and long-term care later in life. Many would argue that extended long-term care could double or even triple that number. While buying various insurances like a supplemental Medicare policy or a long-term care policy might not change the bottom line, it could reduce the risks associated with catastrophic medical expenses. Uncertainty is the dagger in the financial confidence that retirement should epitomize. The goal for insurance is to reduce the risk of the unknown.
3. Being Too Conservative
One of the most common and detrimental mistake we see retirees make is being too conservative. Many think that at retirement they can no longer tolerate any risk because they no longer have the time to allow any losses to recover, but if growth isn’t maintained through retirement, you face a whole different set of risks, most notably the risk of running out of money. Inflation is a very real concern that people ignore all too often.
Consider a couple who needs $6,000 each month in retirement income ($72,000 annually). If they lived into their mid to late 80’s—the average retiree’s life expectancy—that yearly total would turn into almost $140,000 after inflation. Social Security has a built-in Cost of Living Adjustment, but Medicare premiums also increase every year to offset most of the increase in Social Security. (Ask anyone drawing Social Security if their annual increase is substantial.) Although CDs, bonds, and rental properties have the potential to provide stable income, by not accounting for inflation, you may have to dip into your valuable principal to keep your standard of living. In other words, in order to survive, you may have to eat the “goose that lays the golden eggs.”
Diversifying your income should be considered. We all know the importance of diversifying a portfolio, and it’s becoming equally important for income. Yes, for most retirees, stable income should be a portion of the overall plan, but investments that have the potential to create rising income may be the missing link critical to maintaining their standards of living.
4. Chasing Sexy Investments
We’ve all seen the investments that seem like the “next big thing.” Sometimes new ideas and technologies evolve into miracle drugs and life-altering products, but many more never reach their potential. Investing large stakes in the “It” brand is the quintessential high risk/high reward scenario and something soon-to-be retirees should handle with care. Investing in a sound, diversified portfolio with an appropriate balance between suitable investments will likely fare much better and cause far fewer ulcers than trying to catch the next wave. Regardless of how many times you read the story, the tortoise always wins.
5. Letting Short-Term Headlines Effect Long-Term Decisions
People often call and ask if we should move investments into something “safer” in preparation of a coming event. A new retiree recently asked if he should wait until after the 2016 presidential election to invest his 401k rollover. The response? “Do you plan on waiting a year to start taking income?” Far too often, investors will take headlines or current events and make life-altering decisions based on these short-term events. If someone needed a year’s worth of income and waited a year to start drawing retirement income, it could be an enormous setback. Sure, a government shutdown or presidential election could affect your investments, but a proper portfolio should be able to weather it, regardless. Take a long-term approach, and don’t sweat the small stuff. It could cost you.
Remember, moderation is key. Being too greedy or too afraid causes you to make irrational decisions. A very important key to investing isn’t trying to outsmart global economies, find the next big thing, or preserve money at all cost. In investing, discipline wins. Retirement shouldn’t be stressful, but rather a time of enjoyment and relaxation. By covering all of your bases, being properly diversified, and disciplining yourself enough to stick to a plan, you can work towards setting yourself up for some very pleasurable golden years.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing.
All illustrations are hypothetical examples and are not representative of any specific investment. Your results may vary.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing involves risk including loss of principle. No strategy assures success or protects against loss.