By STEVEN C. FINKELSTEIN and MEGAN E. GEHRMAN
I often tell my children, “Today ain’t no dress rehearsal!” The analogy is that if you are five years on either side of retirement, which we call the “red zone,” there are no second chances to get it right. So, let’s look at our top eight retirement mistakes to avoid both before and during retirement.
1. Collecting social security too early
Oftentimes we see people drawing Social Security early without first considering assets to generate income. Half of all Americans don’t wait to reach their normal retirement age before collecting Social Security. Collecting Social Security too early not only eliminates the opportunity for an increased benefit in the future, but hinders a higher benefit for survivors.
2. Underestimating expenses in retirement
Many people believe that they will spend less money in retirement than they did while working. The assumption is that they won’t have to pay for the daily commute, work wardrobe, lunches, etc. That is typically inaccurate, especially in the early years. Most people actually spend more money than when they were working. In retirement you often have 24/7 to shop, travel, and have fun with hobbies and interests that you did not have as much time for while working. Retirement, to many of our clients, means that “every day is Saturday!”
Steven C. Finkelstein
3. Lack of tax diversification among investment/retirement accounts
In retirement, the name of the game is creating tax-efficient income. It’s helpful to have several kinds of accounts; from taxable (non retirement) to tax-deferred 401k/IRA to tax-free (Roth IRA). This creates the most flexibility when creating a paycheck in retirement. Recently, a prospective client who was on the verge of retiring came to see us with a sizable amount in their retirement account but no other assets. Not only does that make his retirement income stream fully taxable, it will subject his Social Security benefits to higher taxation. It pays to consult a financial advisor to create a tax efficient portfolio before beginning to take retirement income.
4. Not prepared psychologically for retirement
Many people identify what they do as who they are. It can be difficult to let go of that persona. I have seen a number of people actually become bored and even depressed once retired, as they do not have hobbies or interests to keep them engaged. This can put a strain on marriages. Couples have different views on what retirement will entail, and they are not used to spending so much time together. For many workers, the workplace is their social outlet. Retiring too early may unintentionally cut you off from this social outlet. Further, although you may be fortunate to retire early, the people you rely on for social interaction may not be as fortunate as you. So, you have to ask yourself, who are you going to hang out with?
5. Retiring too soon
Staying employed a few extra years can boost your retirement income by a third or more because it lets you avoid tapping savings right away and delay taking Social Security benefits, which increase 8 percent every year you wait from your full retirement age.
6. Not working with a certified financial planner who will view your financial life holistically
Merely having investments does not help you truly secure your financial future. People getting ready to retire need to think about other things, like ensuring you have an adequate savings reserve for emergencies, adequate life insurance, a plan for charitable giving, boundaries for contributing to a mortgage as a percent of your income, etc. Financial freedom and confidence isn’t as simple as having investments in your 401k.
Megan E. Gehrman
7. Not taking advantage of your 401k or self-employed retirement plans
If your company offers a 401k plan and you’re not contributing, you’re making a huge mistake. Contributions to your 401k come out of your paycheck before taxes, meaning it’s a portion of your income that you won’t pay taxes on now. And many employers have a match program. This is free money of which you should take advantage.
8. No intentional plan to cover health care and long-term care costs
People are living longer, so they will need health care. Many people think Medicare will cover all their medical expenses. It doesn’t. Payment depends on the type of treatment. And it also doesn’t cover dental work, vision and hearing. As people age, these issues become more immediate. They underestimate what they will have to pay. Many health care experts suggest that health care costs for a couple after age 65 throughout retirement will cost $250,000-$300,000. And that doesn’t cover skilled nursing.
Just like in the game of pool, you want to avoid the eight ball. Avoiding these eight mistakes while in the “red zone” is necessary for financial success in the game of life.
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Steven C. Finkelstein, CFP®, is president and financial advisor, and Megan E. Gehrman, CFP®, is financial advisor at Sterling Retirement Resources, Inc., in St. Louis Park. For a complimentary consultation about your retirement, contact Finkelstein at 952-224-7161 or: scf@sterlingretirement.com, or visit: www.sterlingretirement.com.
