I’m a Financial Planner: 5 Mistakes Even My Wealthy Clients Make When Planning Retirement
Written by
Jennifer Taylor
Edited by
Jenna Klaverweiden
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Having a large nest egg doesn’t guarantee a plush retirement. Even the wealthy need careful retirement planning to prime their finances to shine.
GOBankingRates spoke with two financial advisors to find out what wealthy clients often get wrong in the retirement planning process.
1. Having a Lack of Diversification
In an investment portfolio, too much of one thing likely isn’t a good thing.
“This often comes in the form of ‘hometown bias,’ where U.S. investors typically allocate around 80% of their equity portfolio to the U.S. market, even though it constitutes closer to 50% of the total global market,” said Kevin C. Feig, certified financial planner (CFP), certified financial therapist (CFT), certified public accountant (CPA), personal financial specialist (PFS) and founder of Walk You To Wealth. “Historically, over long periods, these markets often perform in opposite directions — when one is experiencing a long-term bull market, the other may be lower.”
Diversification is important, as it helps increase long-term returns and reduce volatility, offering a smoother ride with a better outcome, he said.
2. Following Bad Advice
There’s no shortage of financial news online and in the media — and most of it is detrimental to your health, Feig said.
“For example, listening to ‘financial experts’ who are paid to entertain, not to educate, pontificate on the next recession might lead you to panic and sell your investments” he said.
In this case, it’s not uncommon to inadvertently ignore taxes and fees, he said.
3. Choosing a Fixed Spending Number Too Early
Wealthy retirees often assume they need to withdraw a set amount of money each month, but this isn’t the case in early retirement, said John Boyd, CFP, founder and lead wealth advisor at MDRN Wealth.
“Spending is phased often higher before Social Security begins and lower later,” he said. “When clients lock into a flat withdrawal strategy, especially for higher net worth clients, it leads to pretty significant underspending.”
Retirement income is flexible, not fixed, creating the need for potential changes along the way, he said.
4. Making Poorly Timed Roth Conversions
It’s not uncommon for wealthy retirees to assume they need a Roth conversion, but this is actually a tax rate decision, Boyd said.
“Converting during peak income years, ignoring ACA [Affordable Care Act] subsidy positioning or failing to account for future Social Security and RMD layering can make a well-intended strategy inefficient,” he said.
Generally speaking, conversions aren’t a mistake. The misstep is opting for one without modeling the next 10 to 20 years, he said.
5. Not Taking Advantage of the Early Retirement Tax Window
“The years between retirement and age 70 are often the most flexible tax years of a client’s life,” Boyd said. “Income can be highly controlled during this window.”
If intentional planning doesn’t occur during this time period, wealthy retirees can lose opportunities to manage future RMD exposure and the impact of Medicare premiums.
“The biggest mistake isn’t making a catastrophic error — it’s making no strategic decision at all,” he said.
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