Ignorance is not bliss; it is the blindfold that has caused many retirees to fall into holes they should have easily avoided.
We will discuss seven costly mistakes that retirees make and how you can avoid the same calamities that befell others and enjoy retirement the way you had intended.
Assuming Social Security Will Be Enough
The government never intended for social security to fully replace your income. The average in January this year was $1,543/month – maximum retirement benefit of $3,148/month. That is $18,516/yr and $37,776/yr, respectively.
The amount is nothing to sneeze at, and some mistakenly cash in too early. Delay the collection for a few years if you can and live off of your portfolio. You will see an 8% increase in benefits/year each year between 67-70.
Set up an account at the SSA website to see how much you should expect. You can see how much more you will need to reach your retirement goals.
Drawing from Your 401K
Your 401(k) is essentially your piggy bank filled with money you deposited along with any extra funds from your employer matching some or all your contributions. So what’s the big deal about getting a loan from it if it’s yours? Withdrawals are taxed if it isn’t a Roth.
Realistically, you also aren’t paying back what you withdrew and adding more to the 401(k) those few months to get square? You’re also missing the contributions your employer would have made during this period. Traditional 401(k)’s give immediate tax breaks, whereas Roths help avoid tax later.
Look at other income sources first, before taking a loan or drawing from a 401(k).
Not Considering Fixed Annuities
People tend to overlook fixed annuities even though they offer predictable investment returns, guaranteed minimum rates, tax deferrals and relative security for your principal. Here are a few types to look into:
- Straight life annuity.
- Deferred annuity.
- Substandard health annuity.
- Life annuity.
- Variable annuity.
- Indexed annuity.
- Joint life with last survivor annuity.
There are many different types of annuities, so shop around and take time to consider your options. Pick one which matches your needs, and go with a company that has excellent financial strength.
Underestimating Healthcare Cost
Failing to account for healthcare during retirement leads to massive miscalculations. We all age, and the risks of serious medical complications increase as we get older. Costs can consume nest eggs if we are not equally prepared with health insurance to cover the increasing risks.
Medicare packages offer a great deal of coverage, so enroll as soon as you are eligible – three months before your 65th birthday. Check what your Medicare package/plan covers and get insurance to cover the rest.
Preventative measures can catch some diseases when they are much easier and less expensive to treat.
Ignoring Long-Term Care
Most Americans do not think they will need long-term care. Most Americans are wrong about this. Most older Americans lack long-term care plans.
The odds are not in our favor. Prepare by applying for long-term care insurance in your mid-to-late 50s instead of your 70s to keep costs down. Keeping yourself physically fit and healthy helps to keep you financially fit and healthy.
Not Having a Withdrawal Strategy
Retirees fall into a pit trap of going through their nest egg and investments too quickly. We are living longer, and age 65 is 25 years away from 90 (30 from 95). A miscalculated plan of withdrawal will leave you bereft of the finances you so carefully cultivated for retirement.
You can use the 4% rule to benchmark how much you can safely pull from your nest egg. Only withdraw 4% of the total nest egg value each year to ensure that the nest egg will be viable for 30 years. However, speaking with a financial advisor and developing a withdrawal strategy is recommended.
Avoiding the Stock Market
So many fear the stock market and make low-risk investments and low-interest rates. Your money is now at the mercy of inflation. Try investing in low-cost mutual funds or exchange-traded funds if you are looking for diversified and less volatile stock options.
Historically, stocks over time average 10% growth each year, which keeps investments safe from inflation and outpaces bonds. Continue growing nest eggs after retirement, but decrease the risks you take as you age. Keep a diverse portfolio for easier risk management, but be careful of being too conservative and avoiding the stock market completely.
Final Thoughts
Everyone’s situation is different, but any one of these mistakes or a handful of them together can steer you off course and leave you stranded. It seems far from fair that a misstep, a miscalculation or just some misguided actions can cause such stress and grief.
Don’t plan your financial plan and make decisions alone. Pay a professional, reputable financial advisor to look over your plans for the future. That consulting fee could save you tens of thousands of dollars down the line and the stress of financial problems when you should be enjoying your retirement.