Financial Mistakes to Avoid as You Approach Retirement

Jane Young, CFP, EA

Jane Young, CFP, EA

As you enter your 50s it becomes increasingly important to incorporate retirement planning into the management of your finances.  Your 50s and 60s will probably be your highest earning years at a time when expenses associated with raising children and home ownership may be tapering off.  It’s crucial to take advantage of the opportunities during this time to shore up your retirement nest egg.

One significant retirement mistake is the failure to assess your current financial situation and understand how much is needed to meet your retirement goals.  Many underestimate the amount of money required to cover retirement expenses which may result in delaying retirement.   Consider hiring an advisor to do some retirement planning and help you understand your options, how much money is needed, and what trade-offs may be required to meet your goals.

Another common mistake is to move all of your retirement funds into extremely conservative options, as you approach retirement.  With the potential of spending 30 to 40 years in retirement, it’s advisable to keep a long term perspective.  Consider keeping your short term money in more conservative options and investing your long term money in a well-diversified portfolio that can continue to grow and stay ahead of inflation.  As you approach retirement, it’s also important to avoid making emotional decisions in response to short term swings in the stock market.   Emotional reactions frequently result in selling low and buying high which can be harmful to your portfolio.

Many in their 50s and 60s have more disposable income than at any other stage of life.  Avoid temptation and be very intentional about your spending.   Avoid increasing your cost of living with fancy cars and toys or an expensive new house as you approach retirement.  Instead, consider using your disposable income to pay down your mortgage or pay off consumer debt to reduce your retirement expenses.

Another common pitfall is spending too much on adult children including your child’s college education.  The desire to help your children is natural and admirable but you need to understand what you can afford and how it will impact your long term financial situation.  Place a cap on how much you are willing to contribute for college and encourage your kids to consider less expensive options like attending a community college or living at home during their first few years of college.   They have a lifetime to pay-off reasonable student loans but you have limited time to replenish your retirement funds.

Finally, a failure to care for your health can be financially devastating.  If you are healthy you will probably be more productive and energetic.   This can result in improved job performance with more opportunities and higher income.  If you are in poor health, you may be forced to retire early, before you are financially ready.   You also may face significant medical expenses that could erode your retirement funds.

Working Part Time in Retirement Becoming the Norm

Jane Young, CFP, EA

Jane Young, CFP, EA

With the possibility of living another 20 to 30 years in retirement, many baby boomers are considering part time work in retirement.  According to a report by the Transamerica Center for Retirement studies, 82% of people in their 60’s either expect to work past 65, already are doing so or don’t plan to retire.   Likewise, a 2013 Gallop poll found that 61% of people currently employed said they plan to work part time in retirement.  While many seek part time work for financial reasons, working in retirement can also provide tremendous psychological and health benefits.

With the loss of traditional pension benefits many retirees need an extra cushion to cover retirement expenses.   Working part time can provide many financial benefits including the reduction of distributions from your retirement account.  Part time work can also help you avoid drawing from your portfolio when the market is down and the additional income can make you more comfortable increasing the risk in your portfolio, with the potential for higher returns.   Another benefit of working part time is the opportunity to delay Social Security benefits till age 70, when you can earn a larger benefit.  Additionally, part time earnings can be used to improve your future cash flow by paying off your mortgage, credit card debt, vehicle loans, and proactively address household maintenance and repairs.

Aside from the financial benefits, numerous studies have found that people who work in retirement are happier and healthier.  Part time work can give you a sense of purpose, identity and relevance.   It can also replace the social interaction that is lost when you retire.  A 2009 study in the Journal of occupational Health Psychology found that those who worked in retirement experienced better health.   Additionally, a study reported by the American Psychological Association in 2014 found that working in retirement can delay cognitive deterioration.

If you are considering part time work during retirement, start developing a plan before leaving your current position.  Leverage and expand your existing network while you are still working.   Your current employer may be interested in retaining you on a part time basis or may be aware of other opportunities for you.

Think of creative ways to utilize your skills, experience and passion to find or create a job that you will enjoy.  You may want to start your own business doing free-lance work or consulting.  Consider turning your hobbies or interests into a business such as tutoring, handyman services, party planning, programming or working for a golf course.  If you have management experience you may be able to fill a gap as a temporary executive while an organization is going through a transition.

Keep an open mind, be flexible and stay connected with your network.  Here are a few sites that can be helpful in finding part time work; Retirementjobs.com, Flexjobs.com and Coolworks.com.  Please use extreme caution when using internet job sites; many are scams that look legitimate.

Things to Consider Before Filing for Social Security

Jane Young, CFP, EA

Jane Young, CFP, EA

Social Security seems straight forward but it can be quite complex, there are many opportunities and pitfalls to watch out for.  Before filing for Social Security, research your options to maximize your benefit, minimize taxes and avoid errors in your benefit calculation.  It’s important to meet with a Social Security Representative prior to filing but don’t solely rely on this information.   Due to the complexity of various options, they may overlook something that could impact your situation

You can file for Social Security benefits as early as 62 but you will receive a reduced benefit.  Most healthy individuals should hold off on taking Social Security as long as possible.  If possible, delay taking Social Security until age 70.  Your benefit will increase 8% a year from your full retirement age to age 70.  The full retirement age for individuals born before 1954 is 66 gradually increasing to age 67 for anyone born in 1960 or later.

Upon reaching full retirement you may be eligible to take 50% of your spouse’s benefit or 100% of your own benefit if you are currently married, were born before 1954 and your spouse has started taking benefits.  While taking spousal benefits, your benefit can continue growing until you reach age 70 at which time you can switch to 100% of your own benefit if it’s higher.  There is no advantage to delaying benefits beyond age 70.

If you have been divorced for two years or more, were married for at least 10 years and are currently unmarried, you are eligible to receive 50% of your ex-spouses benefit or 100% of your own benefit.  If you were born before 1954, at full retirement you have the option to start taking 50% of your ex-spouses benefit and switch to your own retirement benefit at a later date. If you are a widow and you were married for at least 10 years you are eligible to take the highest of 100% of your deceased spouses benefit or your own.

If you take benefits before your full retirement age you are limited on how much you can earn before your benefit is reduced. In 2016, your benefits would be reduced by $1 for every $2 earned over $15,720.  Benefits lost due to work will result in a higher benefit later.  There is no income limit if you wait to take benefits at full retirement. If you take Social Security while working a larger portion of your benefit will be taxable, so you may want to consider delaying Social Security until you stop working or reach age 70.

If you held jobs where you paid into Social Security and you receive a pension from working in a job where you did not pay Social Security, your Social Security benefit may be reduced.  Be sure to notify the Social Security Administration of your pension.

More information on your Social Security benefits is available at www.ssa.gov.

Get Serious About Planning for Retirement in Your 50’s

Jane Young, CFP, EA

Jane Young, CFP, EA

In our 50’s we still have time to plan and save for retirement and it’s close enough that we can envision ourselves in retirement.  Below are some things to address as you plan for retirement.

  • Set some goals and make plans, what does your retirement look like? Consider your path to retirement and your timeframe – you can gradually transition by working fewer hours in your current job, work part time in a new career field or completely stop working.  Think about how you will spend your time in retirement.   Work usually provides us with mental stimulation, a sense of purpose and accomplishment, social interaction and a sense of identity.  How will you meet these needs in retirement?
  • Evaluate your current situation. Take a thorough look at current expenses and assets.  Analyze your spending habits and compare this to your earnings.   Look for opportunities to save money to invest and prepare for retirement.
  • Ramp up savings and maximize your retirement contributions – try to save at least 10% to 15% of your annual income. Increase contributions to your 401k and IRA to take advantage of catch-up provisions.  These are your highest earning years where you can really benefit from investing in tax deferred retirement plans.
  • Invest in a diversified portfolio that will grow and keep up with inflation. Your retirement savings is long term money that will need to last another 30 – 40 years.   A reasonable portion of this money should be invested in stock mutual funds to provide you the growth needed to carry you through retirement.
  • Take steps to reduce your retirement expenses – pay off high interest debt, credit cards and vehicle loans. Make extra payments on your mortgage to pay it off around the time you retire.
  • Think about where and how you want to live. Do you want to move to a lower cost area or downsize to a smaller home? Put plans in place to meet your goals.  Complete major remodeling, repairs and upgrades on appliances before you go into retirement.
  • Develop a retirement budget. Consider the impact of inflation and taxes on your monthly outflow.  Many retirees are more active and spend more early in retirement.   Include expenses for health care and long term care in your budget.
  • Evaluate your Social Security options. Delay taking Social Security benefits as long as possible, up to age 70.
  • Calculate how much you need to pull from your retirement savings by subtracting your monthly expenses from your Social Security and pension benefits. As a rule of thumb, avoid spending more than about 4% of your retirement savings per year.  This will vary with the amount of risk you are comfortable taking in your portfolio.  To get a more precise projection on when you can retire, how much you can spend and how much you should save, periodically work with a financial planner on some formal retirement planning.
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