Tens of millions of Americans are looking forward to the day they retire. Others enjoy their profession and can’t imagine a life without work. Yet, even those folks recognize that one day they won’t wake up on a Monday and head into the office.
In either case, a common goal is present — a comfortable retirement that doesn’t force them into a drastic lifestyle change. And while it’s a well-worn cliché, a failure to plan is another way of saying you are really planning to fail.
We want to take a step back and talk about the basics or the fundamentals, and review important mistakes retirees sometimes make.
Experience isn’t always the best teacher. Many times, someone else’s experience is. If you can avoid common pitfalls, you can sidestep costly mistakes and reduce the stress that can sometimes accompany retirement.
8 retirement mistakes to avoid
1. Falling prey to scams
Sadly, scams are proliferating in today’s tech-driven world. They are just a mouse-click away. You must always be on guard.
We recently came across an article that illustrated how homebuyers were being scammed out of their down payment. Long story short, a buyer unsuspectingly receives and acts on fraudulent wire instructions from criminals who have hacked into the computer of their real estate agent. The hackers are posing as their agent.
Unfortunately, the seller rarely has any recourse, losing both the home and cash.
This illustrates that the criminal mind is only limited by creativity. Scams, including investment scams, come in multiple forms.
If you believe an alternative investment might be worth considering, but lack of expertise prevents you from formulating the right questions, we promise we’ll provide you with a fair and objective assessment.
2. Draining your savings too quickly
Once you retire, there may be the temptation to shift spending toward new hobbies or travel. Unless you have substantial reserves set aside, spending too much too soon could create unwanted stress and exacerbate worries that you might outlive your retirement assets.
Set up a budget and look for ways to trim expenses without a significant change in lifestyle. Simple changes can sometimes yield substantial savings.
3. Being house rich and cash poor
If you own your home, might it be time to downsize? You may be able to lower your utilities, maintenance, property taxes, insurance and more by moving into a smaller home that doesn’t appreciably impact your lifestyle.
Equity that remains can supplement savings.
4. Failing to take healthcare into account
Medicare doesn’t cover everything, and long-term care expenses may eventually crop up. With some appropriate adjustments, we can make sure you are aware of your options and plan accordingly.
5. Being haunted by an investment mix that is too aggressive or too conservative
As you near or enter retirement, the more aggressive posture that served you well may no longer be appropriate. It goes without saying there may not be the time to make up unanticipated market losses, especially if you are forced to liquidate to cover normal or unexpected expenses.
Conversely, getting too conservative in retirement can put unwanted constraints on your portfolio. The danger — your investments lack a component geared toward appreciation, creating the risk you may outlive your money.
While time-tested principles can guide us, each situation is unique and we can assist you in finding the right balance.
6. Claiming Social Security too soon
It may be tempting to file for Social Security when you reach 62. But, did you know you will reduce your monthly benefit by 25% by not waiting until full retirement — now 66 years of age?
Every year you delay past full retirement age increases your monthly check by 8%, until you reach 70, where you’d receive another 32%. Plus, annual cost of living adjustments are based on your current benefits. So, if you delay, you will not only receive a larger monthly check, but the annual cost of living increases will be based on the larger base amount.
Of course, many factors determine when it’s best to claim your benefits, including life expectancy.
Married couples have several options that are not available to those who are single. And let’s not overlook spousal benefits, which may be eligible for those who are divorced.
Social Security offers many options and strategies. If you are so inclined, let’s talk and see what may work best for you.
7. Ignoring taxes
Most of you will see your marginal tax bracket drop in retirement. But some seniors may be in for a rude awakening when they file.
Many are aware that IRA or 401k distributions are taxable, but sometimes fail to adequately prepare when they take distributions.
The same holds true for interest, dividends and capital gain distributions from mutual funds. In addition, some folks are surprised to find that Social Security may be subject to taxes.
If you file as an individual and your combined income (adjusted gross income + nontaxable interest + ½ of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If the total is more than $34,000, up to 85% of your benefits may be taxable. For married couples, raise the numbers to $32,000 and $44,000, respectively.
Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam, but preparation can reduce the tax bite. And proper planning can eliminate surprises at tax time.
8. Leading a sedentary lifestyle
For some individuals, working and socializing go hand in hand. When they retire, they inadvertently disconnect from the world. Don’t let this happen to you!
Stay active and exercise as you are able. Have you considered a senior aerobics class or other low- impact exercises? Talk to your doctor. He or she will be thrilled to recommend a plan.
Stimulate your mind. Some like to read, others enjoy puzzles or brain teasers. Or you might consider an online class.
What is your passion? Now is the time to volunteer. Local organizations or your church can point you in the right direction. As a bonus, it will open up avenues for new friendships.
This isn’t an all-inclusive list. It’s not meant to be, but avoiding common mistakes will reduce your stress and help you get the most out of your retirement.
Changing gears — upward march in stocks
No question about it — those who have invested in a well-diversified equity portfolio this year have been handsomely rewarded.
Of course, we rarely recommend diving into a portfolio that’s 100% invested in stocks, unless you are young and your tolerance for risk is high.
When markets get volatile, those who are 100% invested will see the biggest declines. Simply put, other asset classes help reduce volatility and put you on a straighter path toward your goals.
The tailwinds that have driven stocks over the last year, and for that matter, over recent years, remain in place.
Economic growth in the U.S. has been quite resilient, even in the face of devastating hurricanes.
The U.S. Bureau of Economic Analysis reported at the end of October that Gross Domestic Product (GDP) expanded at an annual pace of 3% in Q3. It’s the second-consecutive quarter of GDP growth that has met or exceeded 3%. The economy hasn’t experienced that since 2014. But it’s not simply just what’s happening at home; we’re witnessing an acceleration in economic activity around the world.
One byproduct for investors is solid corporate profit growth. It’s a key factor in the stock market equation.
Throw low inflation and low interest rates into the mix and the S&P 500 Index set 11 new all-time closing highs in the month of October.
Table 1: Key Index Returns
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: September 29 – October 31, 2017
YTD returns: December 30, 2016 – October 31, 2017
*Annualized, **in U.S. dollars
We have never favored market timing as a strategy — you know, hoping to sidestep the inevitable declines and get back into stocks prior to the inevitable upswing. It’s simply not possible to accurately and consistently predict the future. We know that seems obvious, but it must be said.
Our approach has always been a time-tested strategy based on the historical data that takes the bumps in the road into account.
We won’t venture a guess as to how markets may perform next year or through the remainder of the decade, but we’ll participate in the upside and use various evidenced-based strategies that will mitigate, though not eliminate, the downside.
History tells us this has been the best path to wealth accumulation and obtaining your goals.
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