How you plan your finances in retirement may be just as important as the process of saving for retirement. Here are some key considerations.
You’ve spent a lifetime planning your retirement goals, contributing to your 401(k) and perhaps investing additional assets in IRAs and other accounts. Now, you’re finally on the verge of retiring. However, you may be surprised to find that retirement planning doesn’t stop once you retire.
To keep your life and retirement goals on track, here are several pitfalls to avoid as you embark on this new exciting chapter in your life.
1. You Apply for Social Security Benefits Too Early
You can apply for benefits at age 62, but the benefit you receive will be up to 35% less than it would be if you waited until what the Social Security Administration deems Full Retirement Age.
Electing to receive benefits before your Full Retirement Age can reduce the benefits if you decide to keep working. For every $2 you earn above a specific threshold, which in 2017 is $16,920, you lose $1 in benefits. Unless you really need the money, consider waiting to apply. And if you can afford it, put off applying until age 70 when your benefit will be about 32% higher than it would be at Full Retirement Age.
2. You Fail to Take a More Conservative Investment Approach
When you were younger, you could invest more aggressively because you had time to recoup any losses you might have incurred. As you approach retirement, however, the game changes. You’re going to need the assets you’ve accumulated for day-to-day expenses and no longer have the cushion that comes with decades of saving years ahead of you.
It’s important to employ a strategy that considers capital preservation, especially during the early years of retirement when you’re beginning to withdraw assets from your nest egg. Without this consideration, the combination of spending and volatile markets might deal your portfolio a blow from which it may not be able to recover.
3. You Spend the Way You Used To Spend
Hand in hand with a more conservative investment approach is a more conservative budget. You don’t necessarily have to compromise the retirement lifestyle you envisioned for yourself, but you do have to maintain a realistic view of your finances.
Since you’re no longer earning a steady paycheck—or you’re working less—your income may not be as high as it once was. A lifetime’s worth of retirement savings can look like an enormous source of assets that you can tap into whenever you like, but your retirement may last 30 years or more. It’s a good idea to work with your Financial Advisor to take inventory of expenses, identify all sources of income and develop a strategy to maintain your retirement lifestyle for as long as you live.
"It’s important to understand the options available to help protect the assets you’ve spent a lifetime accumulating.”
4. You Miscalculate Your Required Minimum Distributions
Generally, once you reach age 70½, you must take annual distributions from your 401(k), IRA or other qualified plan, whether you need them or not (Roth IRAs are exempt from this requirement).
Distributions are generally taxable at your individual tax rate and if you fail to take them, you are subject to a substantial penalty—50% of the distribution or whatever portion of the distribution you neglected to take.
Distributions are based on IRS life expectancy tables and while you can access these tables online and do the math on your own, we suggest you seek the guidance of your accountant or tax advisor.
On a side note, if you are a participant in an employer-sponsored qualified retirement plan (other than an IRA-based plan) and are still working for the plan sponsor, you do not have to start taking RMDs at age 70½, unless you own more than 5% of the plan sponsor or the terms of the plan require all employees to start taking RMDs once they reach age 70½.
5. Not Taking Health Care Expenses into Account
A 2015 survey by Nationwide Retirement Institute found that 79% of respondents have no clue what their healthcare costs will be or dramatically underestimate them.1 The average retired couple now spends about $15,000 a year on health care, of which more than half goes to Medicare premiums. Further, they will spend somewhere between $240,000 and $420,000 over the course of their retirement, depending on their lifespan and health conditions.1
According to the American Association for Long-Term Care Insurance, more than two-thirds of adults will require some form of long-term care after age 65.2 Because of statistics like these, recognizing the potential need for long-term care is an important issue to consider regarding asset erosion.
One option for retirees is a long-term care insurance policy to help protect the assets you've accumulated and allow you to provide your loved ones with a meaningful legacy. It may also provide more options for your care and relieve loved ones from full-time caregiver responsibilities.
1 Source: Nationwide Retirement Institute, Pre-Retirees Fear Health Care Costs, But Are Not Taking Action, December 2015
2 Source: American Association for Long Term Care Insurance, The 2015 Sourcebook for Long-Term Care Insurance Information
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