There’s no way around it: making mistakes is part of being human, and no one goes through life without them. The benefit, though, of past mistakes is that they allow us to learn in order to make better choices in the future. However, when it comes to retirement, there are fewer opportunities for second chances. It’s a life-altering transition where you move from earning money to relying on what you’ve saved. Even if you’ve been planning and saving for years, the transition to retirement isn’t a time to coast. To prepare for everything to go according to plan, you need to make some important decisions and take specific actions. Let’s talk about 5 common mistakes I see retirees often make—and how you can 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 financial advisor to find a withdrawal strategy that helps your money to last as long as you do.
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?
The average couple at age 65 will spend $315,000 after tax on medical expenses. What’s more, the real retirement enemy often comes in the form of long-term care costs. Nearly 70% of retirees will need some form of long-term care during their lifetimes, and with average long-term care costs hovering around $315 per day, or $9,584 per month, for a private room in a nursing home,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 buffer in place to help protect against unforeseen medical expenses later in life. Additionally, 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 usually want to play it safe in the stock market by investing conservatively and safeguarding 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 purchasing power down the line. With inflation hitting a staggering 9.1% in 2022 and still hovering above the desired target range at 3.24% as of October 2023, most retirees can’t afford to avoid the stock market volatility that comes with investing at least a portion of their savings in growth assets.
Your retirement may last anywhere from 20 to 30 years or more, so don’t get caught 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. 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 may all be taxed differently. If this hasn’t been accounted for ahead of time, your withdrawal plan could leave you 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 tax consequences, including inadvertently causing more of your Social Security income to be taxable, 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 as part of your overall withdrawal strategy can help you to 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 review your tax bracket, retirement accounts, Social Security benefits, and any other income sources to help you formulate a plan to withdraw money in the most tax-efficient way.
How We Can Help
Of course, it’s impossible to avoid every mistake, but that doesn’t mean we can’t plan ahead for a smoother journey to a satisfying retirement. At Center for Wealth Management, we have decades of experience and knowledge to assist you in handling your money wisely while steering clear of the common retirement mistakes mentioned above. As your trusted guide on this retirement adventure, we can work together to make a practical budget and create a financial plan that helps to avoid these and other mistakes and save you more money.
To find out more about how our services can contribute to a comfortable and stress-free retirement, get in touch with us today and schedule a free introductory meeting online, call (248) 220-4321, or email me at email@example.com. I look forward to speaking with you.
Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner.
Outside of work, Justin enjoys spending time with his family. He and his wife, Corinne, have five children between them ranging in age from sixteen to twenty years old. Justin lost his first wife, Heather, to brain cancer in 2020, and thus has experienced firsthand the emotional, mental, and financial challenges spouses and children go through when dealing with such a tragic situation. Outside of work, Justin enjoys coaching or attending baseball, softball, powerlifting, and basketball events, traveling to new locations, and spending time at the family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.