Imagine that you’ve got a great retirement plan. Sweet! Then imagine that one mistake here and another mistake there puts a serious dent in your financial security. That would be very painful.
That doesn’t have to happen to you. Here, financial experts across the country share the mistakes they see their clients committing and offer tips for wiser decision making.
1. Believing Social Security will be enough. “It won’t be,” reports Jason Speciner, CFP®, EA, founder of Financial Planning Fort Collins, a fee-only firm in Colorado. “If in retirement you want the same lifestyle you now enjoy, you’ll need additional revenue sources beyond Social Security. In fact, the more you currently earn, the less Social Security will cover of your retirement needs by percentage.
“Generally speaking, your annual benefit will be somewhere between $16,000 and $32,000 in today’s dollars, depending on the level of income you paid Social Security taxes on, how that averaged over the 35-year period for the calculation, and when you start to take the benefit,” notes Speciner.
“If you earn $50,000 a year for 35 years, you’ll get about $17,500 in Social Security annually, which is 35 percent of what you’ll need to maintain the same standard of living,” he states. “If you make $200,000, you’ll get $32,000, or only 16 percent of what you’ll need to keep your current lifestyle.
“Remember, the age you elect to take Social Security benefits affects how much you get,” says Speciner. “If you start taking the benefits as soon as you’re eligible, Social Security will pay you less than if you waited to take the benefit upon your full retirement age as defined by the Social Security Administration. If you wait a few years more—until age 70—your benefit will increase even more. But don’t make the mistake in thinking it’ll be enough.”
2. Thinking Medicare will cover your health care needs. Another federal benefit Speciner says you shouldn’t rely exclusively on is Medicare. “According to Fidelity, a 65-year-old couple today will need $275,000 over and above Medicare to cover healthcare costs in retirement,” he reports.
“Obtaining supplemental insurance and having an emergency fund of at least three to six months of your monthly expenses will keep you from having to make an unexpected withdrawal from your retirement account,” he predicts.
3. Indulging children at the expense of your retirement savings. “Hands down, the single biggest mistake I see is this: Older parents spoiling their adult children—it’s darn near an epidemic,” says Howard Dvorkin, CPA, chairman of Debt.com, based in Plantation, Fla.
“While these parents should be saving for retirement, they’re instead buying homes and cars for their children and pricey toys and clothes for their grandchildren,” he adds. “I’m all about family myself, but sometimes that means tough love.
“If these older parents keep overspending on their children, they’ll be burdening those children later because they won’t be able to afford their own care,” he predicts. “I really do believe part—but certainly not all—of the retirement crisis is caused by parents who love too much and spend too much.”
Even worse: Paying for such indulgence by tapping into your retirement accounts. “With the divorce rate remaining at 50 percent, many people in their mid-30s to mid-40s, when breaking up with their spouse, run into unexpected financial hardship,” according to Gary Scheer, RFC, CSA, founder of Retirement Financial Advisors in Morristown, N.J. “Enter mom and dad.”
“However, beware of tapping into retirement funds to be of assistance,” he warns. “You may never be able to recoup the money laid out. Providing moral support and a place to live for a while can help your adult children get back on their feet while keeping your own retirement accounts intact.”
4. Not lowering your risk. “One of the biggest mistakes I see retirees or people close to retirement make is not lowering their exposure to volatile equities,” states Michael Darvish, senior private wealth manager at Spartan Capital Securities in New York City. “You have to take on risk based on your tolerance and time frame until retirement, not based on whether you have a gut feeling the market will continue higher.”
Amit Chopra, CFP, founder of Forefront Wealth Planning and Asset Management in New City, N.Y., sees that mistake often combined with another. “This tends to happen before retirement,” he says. “It’s a dual mistake of not taking risk out of your portfolio soon enough when nearing retirement and then underestimating your expenses once you actually retire.
“The old rule of thumb that you need 75 percent of your pretax earnings in retirement is misguided—there’s no one-size-fits-all solution for everyone,” says Chopra. “I plan for 100 percent of income replacement. Another mistake I see often is a lack of emergency funds saved. I have my clients begin to build a cash reserve at least 18 months before their estimated retirement date.”
5. Ignoring required minimum distribution rules. “Holders of IRAs, 401(k)s, and other retirement plan accounts are required to begin taking money out by April 1 in the year after they turn 70.5,” reports Scheer. “For people who don’t need this money to live on or who don’t work with a financial advisor, it’s easy to miss the deadline. If that happens, the government can impose a 50 percent penalty on the money you should have withdrawn if you’d have followed the rules.”
6. Not paying down your mortgage. “Housing costs will be a big living expense in your later years, so the more you can minimize or eliminate it now, the better,” recommends Speciner. “Only 40 percent of those ages 65–85 own their homes free and clear. But there are ways you can accelerate your mortgage payments. Even just one extra payment a year can cut it down significantly.
“While you don’t want to miss out on any employer match to your 401(k), pay down your mortgage after you reach the matching contribution by your employer,” suggests Speciner. “Make it your top priority to get the mortgage paid off before you retire.”
7. Borrowing against your home. “Retirees who need cash may tap into their home’s equity,” explains Justin Lavelle, chief communications director of www.beenverified.com, an online background check platform based in New York City. “The danger is that they’re deciding to take on a debt of monthly payments when they’ve stopped working and are likely living on a fixed income.
“An alternative can be to decrease your housing costs,” says Lavelle. “For instance, you can sell your present home and buy a smaller home in the same neighborhood. If you’re open to relocating, you can move to a less-expensive area that caters to retirees.”
8. Being improperly insured. “Being overinsured can be a drag on cash flow in retirement,” contends Don Orban, founder and CEO of Midwest Retirement Advisors in Omaha, Neb. “Duplicative policies or excessive life insurance can leave you strapped for cash.
“Also, not understanding how fast the cash value on universal life policies can disappear is very common and often results in the policy holder being left with no cash value and no death benefit,” adds Orban. “An in-force illustration is the only way to estimate how long your cash value will prop up a death benefit and help you decide if you just want to take the cash value.”
9. Not paying off your credit card debt. “One of most important things you can do before retirement is pay off all your consumer debt because you’re paying a higher interest on that than you can earn through investments,” advises Speciner.
“Some people close to retirement have used a credit counselor to renegotiate their debts,” he explains. “Or consider freezing them at 0 percent interest for a period of time, usually 18 months, with a balance transfer and a way to pay off that debt when the 18 months is up so you don’t pay additional interest. Others have renegotiated lower interest rates with the credit card company.”
10. Buying a home when it’s not the best move for you. “A lot of baby boomers were taught about the pride of home ownership growing up,” says Chelsea Knapp, a financial advisor and partner at Transparent Wealth Consulting, a fee-only wealth management firm in Rochester, N.Y. “Many still believe renting is just burning money. It may be true that you don’t build equity by renting, but in your golden years, that’s not what’s important. The important thing is to have a well-planned budget, and not having to pay property taxes helps keep your budget reasonable.
“Also, not having a home to repair and maintain allows you to spend time on activities you enjoy, gives you the flexibility to move freely, and allows you to further build your retirement nest egg,” says Knapp. “So don’t assume buying is always better than renting, especially in retirement.”
11. Considering a reverse mortgage later than you should. “One of the biggest mistakes I see when assisting my clients who are considering a reverse mortgage is they’ve viewed the reverse mortgage as a last resort,” asserts Eric Rittmeyer, a certified reverse mortgage professional and president of Fidelis Mortgage in Baltimore; he has 12 years of experience in the federally insured home equity conversion mortgage program.
“There are still lots of misconceptions about how a reverse mortgage works,” he explains. “A federally insured FHA reverse mortgage is a loan that allows homeowners 62 and older to access a portion of their home’s equity. There are no monthly principal and interest payments, and the borrower retains title to the property. The property can be sold at any time, and the borrower keeps all remaining equity after the loan is paid.
“However, instead of using the equity in their home, some retirees draw down their cash assets first,” he explains. “By the time they contact me, all their cash is gone, and they’re backed into a corner.”
12. Falling for a scam. “Scam artists often target retirees,” says Lavelle. “Examples of popular investment scams include medical cards, time-share properties, vacation home rentals, investments in gold, or risk-free bonds.”
Also be aware of dating scams, which often target older, single women; robocalls, particularly ones that claim you’ve won a lottery or contest; and the grandchild scam, in which the con artist poses as one of your grandchildren who’s supposedly in a jam. Read up on them so you can recognize them if you’re a target.
13. Blowing through your budget. “I’ve seen people base their retirement around an unrealistic budget and then just obliterate that budget once they’re in retirement,” states Speciner. “Don’t think that retirement will be some sort of magic pill that will change how you handle money. I always suggest people live with their retirement budget for 6–12 months prior to retirement. In that case, there’s tons of room for evaluation and recalculation.”