Some of the first things retirees need to do when they retire include applying for Social Security benefits, checking in on their investment accounts and updating estate plans. On the flip side of the coin, what should new retirees avoid doing?
Some of the answers might surprise you. Avoid making the following mistakes that can hurt your retirement savings and lifestyle.
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Don’t Be Too Rigid With Retirement Spending Plans
There’s nothing wrong with carefully reviewing your spending habits in retirement. However, it’s a good idea to avoid being too rigid in your plans.
The reason retirees need to be flexible with their retirement spending plans is due to sequence-of-returns risk.
Jesse Cramer, relationship manager at Cobblestone Capital Advisors, said investments often have bumpy returns. Most often, we tend to see multiple years in a row of good returns (bull markets) or bad returns (bear markets). Beginning your retirement with a few years of bad returns causes a disproportionate amount of portfolio stress.
“The main weapon retirees have to combat an unlucky sequence of returns is to remain flexible in their retirement spending plans,” Cramer said. “The sequence-of-returns risk is made worse when a retiree withdraws money from their portfolio. The more money they withdraw, the bigger the risk becomes.”
Cramer recommends retirees consider delaying some of their spending — e.g., postponing a big trip. This will give the market, and their portfolio, time to recover and lessen the sequence-of-returns risk.
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Don’t Forget To Plan Social Security
You do not need to collect Social Security benefits at the same time you retire.
While you can receive benefits as early as age 62, think carefully about whether you should start collecting then or delay. You may delay Social Security as late as age 70 to receive the full payout. Choosing the optimal strategy to fit your financial situation and overall lifestyle, whether this means taking payments at age 67 or waiting until age 70, can result in thousands of dollars more of potential income over your retirement years.
Don’t Spend Your Investment Capital (If You Can Avoid It)
Bob Sewell, CFA and CEO of Bellwether Investment Management, recommends his clients avoid withdrawing more than 4% of their portfolio value out of their accounts from year to year. Withdrawing more than 4% means you’re spending some of your investment capital — and retirees need this capital for the many years of retirement ahead of them.
If you are spending more than 4%, Sewell recommends creating a spending plan to look at what amount of capital can be depleted from year to year without running out of money too soon. Part of this plan should look at optimizing where you draw your funds from among your various investment accounts.
Do Not Take On Debt
Ideally, by the time you reach retirement, you should have paid off all of your debts, including student loans, mortgages and credit card balances. If you have paid off your outstanding debt, do not take on any additional debt.
“You don’t need that burden in retirement when your income is potentially lower, and you don’t have the same abilities to supplement it through employment sources,” Sewell said. “Carrying credit card debt from month to month, lines of credit or a new mortgage rarely makes sense, so do your best to avoid it.”
Don’t Count on an Inheritance
Sewell often sees clients who anticipate a windfall from an inheritance to help support them in their retirement. Counting on an inheritance, regardless of the amount, is not a retirement plan.
“The inheritance you are anticipating may end up being much smaller than you expect, may not be received for many years or may not appear at all,” Sewell said.
The better approach is to look at any inheritance as a bonus to your retirement plan.
Don’t Underestimate Healthcare Costs
Healthcare is one of the most significant expenses in retirement. It’s not uncommon for retirees to underestimate the amount of money necessary for health and medical insurance purposes.
Once you are eligible for Medicare, make sure you thoroughly understand what is and isn’t covered by your Medicare plan. This will allow you to better budget for medical expenses and be ready to cover costs not insured by Medicare.
Don’t DIY All of Your Retirement Planning
You don’t need to do all of your retirement planning on your own. It also can be tricky to manage retirement planning alone in the event of unexpected circumstances, such as death or incapacity of a partner that leaves the surviving partner with challenging financial burdens.
Sewell recommends finding a trusted fiduciary advisor or financial professional who can help ensure your investments are well managed and you and your family are in good hands as you retire.
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