After a lifetime of hard work, you are entitled to the retirement of your dreams. Don’t screw it up!
Many people fail to lay the foundation for a successful retirement – financially, emotionally, and socially. These mistakes may be by omission or commission in the years leading up to retirement. Here, we offer a few tips, so you don’t derail your retirement before even stepping onto that track.
Let’s start with the financial challenges since that takes the longest to prepare for unless you win the lottery or get a big inheritance (a plan most of us cannot rely on).
It’s never really too late to start saving for retirement, but it’s immensely easier if you begin in your 20s or 30s. There is no magic number that your nest egg must reach as long as you are realistic in matching your finances and lifestyle.
Common Financial Mistakes
Here are some of the most common mistakes people make leading up to and in the early years of retirement.
Failing to save money each paycheck and take advantage of an employer’s 401(k) match
You need money to live on for everything from the basics (food and shelter) to the pleasures of life (eating out, travel, and entertainment). There are enough books and articles on this topic to fill a nicely-sized library so we won’t belabor that here. One note: if you are age 50 or older, the IRS allows you to make additional “catch-up” contributions of up to $6,000 a year, bringing your maximum 401(k) investment to $26,000 this year (and $27,000 in 2022).
Borrowing from or cashing out of your 401(k)
Not only do you lose the potential investment gains on the money you withdraw, but you’re also subject to significant taxes and penalties, especially if you are younger than 59½. And if you owe money to your account, you are much less likely to contribute the new dollars you need to build up that nest egg. Even if you are past that age threshold, try not to break open that piggy bank quite yet. Most people depend on their retirement accounts to fund the bulk of their retirement spending.
Getting too conservative with investments leading up to and in the early years of retirement
You may fear the stock market is too risky as you get older. The truth is, you can’t afford not to take that risk. While stocks are more volatile than bonds, they easily outperform other investments over the long term. Getting too conservative with your investment allocation increases the chances of outliving your savings. It’s vital to keep growing your nest egg. It’s also important that your investment returns top the inflation rate, which has become more of an issue this year, and stocks consistently outpace inflation over the long term.
Carrying too much debt into retirement
Paying off a credit card and other debt is a good idea at any age, especially as you head into retirement. It may be tempting to tap the value of your home or take out a loan to pay for your grandkids’ college tuition, but you may be falling into a debt trap. Retirees live on fixed incomes – no more paychecks coming in – and the burden of paying back that debt can become very heavy.
Failing to plan for unexpected expenses, including big healthcare bills as you age
Medicare is great, but it does not cover everything. Whether you choose Original Medicare or an Advantage plan, there still will be plenty of expenses. According to Fidelity Investments, the average 65-year-old couple now will spend $11,700 on health care in the first year of retirement. And that same couple can expect to pay about $300,000 throughout their retirement.
Part of that expense is for ítems not covered by Medicare, such as nursing home care, home care, or assisted living. None of us want to think that we will need that kind of help, but the Department of Health and Human Services says 70% of people turning 65 this year can expect to need some long-term care during their lives.
One option to consider is a Long Term Care insurance policy, which helps pay for the often exorbitant costs associated with an injury, illness, or cognitive impairment that makes it challenging for you to take care of yourself. These policies can be expensive, so discuss the pros and cons with an EKS financial advisor.
Taking Social Security too early
Social Security is great! There is no wrong answer on when to start collecting your monthly benefit, but some solutions are more right. Unless you are in poor health or have no financial flexibility, most experts advise that you delay as long as possible. There is a forever penalty for collecting before your full retirement age (between 66 and 67 for most people born after 1955) and a big bonus for waiting until age 70. You get a guaranteed additional 8% for each year you delay.
Failing to account for taxes and inflation
Future taxes can be tough to calculate, but you have to expect to owe some taxes each year even if you no longer have earned income. And some taxes, including real estate payments, are likely to go up, especially as property values are reassessed in this time of soaring home prices.
Also, inflation eats away at your nest egg, even if you never spend a dime. Assuming a 3% inflation rate (it’s now running well above that), $1,000 sitting in a savings account now will lose more than 30% of its spending power in a decade. And a trip to the grocery store that costs $100 today will cost you more than $126 in 2030.
Falling for scams
You will be targeted as you age, no matter how savvy you are. According to the FBI, millions of elderly Americans fall victim each year to some financial fraud or confidence scheme, including romance, lottery, and sweepstakes scams, to name a few. Elder fraud accounts for $3 billion a year in losses, and it’s growing each year. Many fraudsters try to impersonate government officials. AARP warns that the federal government will not call you unsolicited and ask for personal information, such as your Social Security number. Any important communications from the feds usually come via snail mail.
As Groucho Marx once said, “While money can’t buy happiness, it certainly lets you choose your own form of misery.”
Avoiding these pitfalls can help you live the retirement lifestyle you want and deserve.
In addition to the financial aspects of retirement, important social and psychological factors play into a happy and successful retirement. Later this month, we will explore some of those issues in a new article.