Avoid These Common Retirement Mistakes
When it comes to retirement there are many preconceived notions and myths on how you should handle your finances. Avoid falling into the trap of what retirees are “supposed to do”. Instead, logically evaluate your situation and make decisions accordingly. Below are some common financial mistakes to avoid with regard to your retirement.
- Don’t underestimate your life expectancy and how many years you will spend in retirement. It is reasonable to spend 20 to 30 years in retirement. Most retiree’s should plan to cover expenses well into their 90’s.
- Avoid overestimating your ability and opportunity to work during retirement. Be cautious about including too much income for work during retirement in your cash flow projections. You may lose your job or have trouble finding a good paying position. Additionally, your ability and desire to work during retirement may be hindered by health issues or the need to care for a spouse.
- Many retirees invest too conservatively and fail to consider the impact of inflation on their nest egg. Maintain a diversified portfolio that supports the time frame in which you will need money. Money needed in the short term should be in safer, fixed income investments. Alternatively, long term money can be invested in stock mutual funds where you have a better chance to earning returns that will outpace inflation.
- Resist the temptation to take Social Security early. Most people should wait and take Social Security at their full retirement age or later, full retirement is between 66 and 67 for most individuals. Taking Social Security early results in a reduced benefit. If you can delay taking Social Security you can earn a higher benefit that increases 8% per year up to age 70. This can provide nice longevity insurance if you live beyond the normal life expectancy. You also want to avoid taking Social Security early if you are still working. In 2016 you will lose $1 for every $2 earned over $15,720, prior to reaching your full Social Security retirement age.
- Avoid spending too much on your adult children. The desire to help your children is natural but many retirees need this money to cover their own expenses. You may be on a fixed income and no longer able to earn a living, your children should have the ability to continue working for many years.
One of the biggest retirement mistakes is the failure to do any retirement planning. Crunch some numbers to determine how much you need to put away, when you can retire, and what kind of budget you will need to follow. Without proper planning many retirees pull too much from their investments early on leaving them strapped later in life. It’s advisable to have your own customized retirement plan done to determine how much you can annually pull from your investments. As a general rule, annual distributions should not exceed 3-4% of your retirement portfolio.