Retirement is a huge adjustment for most people, mentally and socially. Your day-to-day routine changes without a job to report to, and you and your spouse have to adapt to being around each other full time.
Your financial strategy also must shift when you leave work, or there could be huge consequences for your nest egg and standard of living. Here are nine retirement mistakes you should avoid making.
1. Taking Social Security Too Early
"Don't start Social Security as soon as you are eligible," said certified financial planner Eric McClain of McClain Lovejoy. "It might make sense to delay, perhaps even draw on your other assets first."
While you might be eligible to start taking your benefit at age 62, waiting until your full retirement age which is 66 (67 if you were born in 1960 or later) results in a monthly payment that is about 30 percent higher than you would receive at age 62. If you can wait until age 70, your benefit will max out and be another 32 percent higher than at your full retirement age.
Additionally, if you take Social Security before your FRA, any income earned above $16,920 (for 2017) will result in a reduction of $1 of your benefit for every $2 of income above that limit. Be sure to check out some of the filing strategies available to married couples if applicable.
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2. Not Investing Aggressively Enough
Retirement is not the end of your financial journey; in many ways it is only the beginning. According to the Society of Actuaries (via Vanguard):
"A 65-year-old man has a 41 percent chance of living to age 85 and a 20 percent chance of living to age 90. A 65-year-old woman has a 53 percent chance of living to age 85 and a 32 percent chance of living to age 90. If the man and woman are married, the chance that at least one of them will live to any given age is increased."
What this means is that you still need to invest a portion of your retirement nest egg for growth. What percentage and how your overall portfolio should be allocated will vary based on factors unique to each retiree's situation. Being too conservative can result in outliving your money in retirement.
3. Ignoring the Impact of Inflation
At a somewhat normal rate of 3 percent inflation, your purchasing power will be cut in half in 24 years. Given the previous statistics, and the fact that we are living longer, inflation is every retiree's worst enemy.
What can you do to mitigate the impact of inflation on your retirement finances?
– Invest aggressively enough to stay ahead of inflation.
– Plan conservatively for inflation while anticipating higher healthcare costs.
– Be prepared to adjust spending and retirement account withdrawals.
4. Not Meeting With a Financial Planner for Retirement Help
Engaging the help of a qualified, fee-only financial advisor for retirement advice can help both pre-retirees and those already retired stay on track.
A financial planning expert can provide you with a detached third-party view of your situation. He or she can help you design a retirement income strategy based on your anticipated resources, including Social Security, any pensions you might have, your tax-deferred retirement accounts and more.
You only get one shot at retirement, so don't let your pride or a reluctance to spend the money on an advisor deter you from getting the help you need.
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5. Not Planning for Healthcare Costs
A couple retiring in 2017 would need $275,000 to cover healthcare costs in retirement, according to a study by Fidelity. This is a significant amount of money even for someone with a $1 million-plus nest egg. For 2018, there will be a cost-of-living adjustment of 2 percent for Social Security, but many retirees' Medicare premiums will also increase.
For those still working and who have access to one, a health savings account (HSA) can be a great way to supplement retirement savings and build up a nest egg with pre-tax money that can be tapped tax-free in retirement for qualified medical expenses.
6. Not Creating a Retirement Budget
A great first step for those approaching retirement is to establish a budget for desired retirement lifestyles. Where will you live? What will you do? How much will it take to fund your lifestyle each month? Do you have the financial resources to support this lifestyle?
If not, you will need to rethink your retirement. Perhaps you need to go back to work or scale back on activities. A budget helps you get a handle on where you are and if you will be OK financially in retirement.
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7. Failing to Have a Retirement Income Strategy
One of the most complex aspects of retirement is managing distributions from various retirement accounts, along with other sources, like a pension or Social Security.
Which accounts should you tap and in what order? What are the tax ramifications? How will your income affect Medicare and other benefits? The ramifications of not having a retirement income strategy can be catastrophic, so protect yourself by making plans now.
8. Not Factoring in the Impact of Taxes in Retirement
Taxes can be a huge factor in retirement. Withdrawals from retirement accounts, such as IRAs and 401ks, are usually subject to full taxation at ordinary income rates. Social Security also can be taxable depending upon your income. Furthermore, these withdrawals are added to any other income you earn.
A Roth IRA is not subject to taxes if all rules are followed, however, and a Roth 401k can be rolled into a Roth IRA to receive similar treatment. Pension payments are usually taxable, but some state pensions might be exempt from state income taxes.
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9. Failing to Understand Annuity Taxation
Annuities are taxable, too. Distributions from non-qualified annuities (purchased outside of an IRA or retirement account) will be taxed to the extent that the money being distributed is not the principal amount you contributed. If you annuitize, the amount of money pertaining to gains will be subject to ordinary income taxes each month.
If you take a partial lump sum from the annuity account, the assumption is that the distribution is from the gains portion of the account, and all partial distributions will be fully taxed until the gains are used up. In a qualified annuity that is inside a retirement account, the same tax rules apply. As with an IRA, the full amount of any distribution is subject to ordinary income taxes.
10. Protect Yourself in Retirement
According to GOBankingRates' 2017 Retirement Savings survey, more than 50 percent of Americans will retire broke. By avoiding these retirement planning mishaps — and getting your spending under control now — you can go blissfully into retirement rather than leaving your financial future up to chance.