Americans make lots of mistakes in planning for retirement—the biggest of which is not saving enough. But even if you've made saving a priority, you still can make errors in retirement that'll make for far less certain senior years.
A recent article on gobankingrates.com, "15 Mistakes Even Smart People Make in Retirement," spells out common mistakes people make in retirement and the ways to avoid them.
- Claiming Your Social Security Benefits Too Early. More than one-third of baby boomers go ahead and claim Social Security benefits early at age 62; however, doing this means a permanent reduction of as much as 25% of your benefit instead of waiting until your full retirement age.
- You Keep Working After Claiming Social Security. If you start receiving benefits at 62 and continue to work, you'll lose $1 in benefits for every $2 earned above the annual limit of $15,720. At full retirement age, you'll lose $1 in benefits for every $3 earned above the annual limit of $41,880 until the month you actually reach full retirement age, when the limit disappears.
- Carrying Debt into Retirement. This can create financial problems, as it leaves you with less money to cover unexpected expenses. Pay off all debt before you retire. If you can't, settle on a plan to have it paid off by a certain date in retirement.
- Being Too Conservative With Investments. Many retirees avoid stocks and are trading off one risk for another, which is failing to have enough growth potential in their portfolio to outpace inflation. Even though stocks can be volatile over short periods, they typically do better than conservative investments over long periods. Retirees should remember that retirement can be 30+ years. They need their portfolio to support them throughout the whole time, so some allocation to stocks is wise.
- Being Too Aggressive With Investments. Other retirees are too aggressive with their portfolios, but these investors aren't being rewarded either. Their portfolios have a greater propensity for loss. Don't stretch for returns. Talk with an advisor to be certain that you're properly diversified with investments that will help you reach your goals.
- Overinvesting in a Single Stock or Asset Class. Some folks have a big chunk of their portfolio in their former employer's stock, which creates risk. A big amount of your retirement income could be riding on the health of that one stock. If it tanks, so does your entire portfolio. Instead, allocate a well-diversified portfolio with exposure to many companies and asset classes.
- Not Knowing How Much to Withdraw. More than 75% of Americans over 40 don't know how much of their retirement savings they can safely spend each year without outliving their assets, and about one-third of those surveyed think they can spend 10% a year. However, based on past investment returns, they'd likely run out of money in 11 years or less at that rate. Typically you can withdraw 4% a year from savings to decrease the odds you'll outlive your money. Your withdrawal rate should be based on expenses and adjusted for the performance of your investments each year.
- Not Taking Required Minimum Distributions. Some retirees do just the opposite: rather than withdrawing too much, they don't take out enough. If you have a qualified retirement plan, like a 401k or traditional IRA, you usually must start taking withdrawals by age 70½. However, you can delay your first required minimum distribution (RMD) until April 1st of the following year after turning 70½. If you don't take an RMD, it's a hefty 50% excise tax on the amount you were supposed to withdraw.
- Ignoring Annuities. Annuities get no attention due to their fees and the unscrupulous sales tactics used by some salespeople. But a basic immediate annuity can be a good addition to a retirement portfolio, as it can provide a guaranteed stream of income. Look at taking a lump sum from your retirement account and determine how much money you will need each year in retirement for fixed expenses, and then calculate how much income you will get from Social Security and pensions. If that doesn't take care of your expenses, think about an annuity to bridge the gap.
- Failing to Update Your Investment Strategy. The investing strategy that you created before retirement might need adjusting once you enter retirement. Once you retire, review your strategy every few years to make sure your savings reflect your needs, and modify it for market conditions.
- Overspending in Early Years of Retirement. Don't try to tackle all of the large expenses that should've been done during working years. Making withdrawals from retirement savings to pay for large home repairs like a new driveway, a new addition or a new roof should be finished prior to retirement. Otherwise, these expenses can make a permanent dent in your portfolio.
- Not Thinking of Home Equity as a Source of Income. A reverse mortgage, which lets you tap your home's equity, or a home equity line of credit can be useful in retirement as a way to cover expenses when the value of your retirement portfolio drops because of a market downturn. You can draw on your home's equity rather than cashing in losing stocks, allowing your portfolio time to recover.
- Neglecting to Plan for Long-Term Care. This can be one of the single biggest threats to your nest egg. At least 70% of adults over 65 will need some form of long-term care, and Medicare and most health insurance plans don't cover long-term care. Unless you have long-term care insurance, you'll have to cover these costs on your own or use Medicaid if you have extremely limited resources.
- Having No Estate Planning Documents. Most Americans don't have a will or a living will or advance directive that states their healthcare wishes if they are unable to make them on their own. These are essential and need to be in place before something happens. Without them, most states will dictate where your funds will go. Work with an estate planning attorney to create these documents and help your loved ones overcome common legal issues that can arise after you pass or in the event you're unable to make decisions for yourself.
- Underestimating How Long You Will Live. The average life expectancy for a man is 76 years and 81 years for a woman; however, many folks live well into their 90s or even past 100. Make sure that your retirement savings will last: plan on living longer than you expect and withdraw from your savings at a rate that improves your prospects for having enough money for many years.
Reference: gobankingrates.com (April 24, 2016) "15 Mistakes Even Smart People Make in Retirement"