If your end goal is a comfortable retirement, the right habits need to be put in place during your working years. But keep in mind that there are also important decisions to be made after you are no longer working. When you’ve been helping folks prepare for retirement for as long as we have, you tend to pick up on common hazards to avoid. Here are 5 common retirement pitfalls we’ve helped our clients avoid, so take notes!
1. Leaving Your Job too Soon
Sometimes continuing to work for an extra couple of years can yield great benefits for several reasons. If your income is at its highest, which is often the case in the later working years, you may increase your Social Security benefits, since your benefit amount is based on your 35 highest-income years. Also, if you have a retirement plan with your employer, make sure to understand how the timing of your retirement may affect the benefits you receive.
2. Spending Your Nest Egg too Quickly
Many retirees like to think most about the early years of retirement when the rewards for decades of hard work pay off. Travel, sightseeing, volunteering, and spending time with grandchildren commonly come to mind as activities to fill these years. While there is nothing wrong with enjoying the well-earned fruits of retirement, we generally encourage our clients to take a conservative approach to budgeting and deciding on major purchases in the earlier retirement years, especially because a period of adjustment is necessary.
3. Drawing on Income Sources in the Wrong Order
Once you have stopped collecting a salary from your employer (or stop actively working in your business), your income streams change shape. We advise our clients to plan ahead and think about the sequence in which they draw from their different retirement income sources, such as pension plans, Social Security (your benefits or your spouse’s), investment portfolios, part-time jobs, business ventures, royalties, or any other income sources available. For instance, if you delay drawing Social Security benefits until age 70 and draw on other sources first, you will increase your benefit amount. Other factors, such as capital gains tax, can also come into play with certain investments, so we need to look at the full picture.
4. Failing to Plan for Medical Expenses
A 2018 study found that adults over 65 years of age have filed for bankruptcy at a rate that had more than doubled in recent decades. (1) Retirees sometimes fail to fully plan for expenses during the later stages of retirement, and medical care often tops the list. Various studies have estimated healthcare costs after age 65 ranging from $169,000 to $404,253. (2) Managing healthcare expenses is not simply a matter of saving enough, but also putting in place the right mix of insurance coverage and utilizing tools such as health savings accounts (HSAs), and fully utilizing Medicare benefits.
5. Neglecting to Reevaluate Your Financial Plan
Throughout all stages of life, you should review your financial plan every two to three years. Your investments and risk level need to be appropriate for your stage of life. Also, your investment strategy may be influenced by the timing of when you will likely draw on your other income sources. The picture can get more complicated for married couples where both spouses worked. Also, if you have adult children, their financial situations are continually changing, and will influence the direction of your plan to some degree.
We at 1on1 Financial know that planning for retirement can be overwhelming, so remember that you’re not alone. Not only is helping our clients create the foundation necessary for a fulfilling retirement our top priority, we also enjoy it! In fact, when you’re a client, we commit to serving you as we would our own family. If you’d like to discuss how our firm can help you plan for these retirement risks (and others) and guide you on the path to financial well-being, call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!
About 1on1 Financial
1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.
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(1) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3226574
(2) https://www.morningstar.com/articles/930202/how-health-shocks-affect-retirement-spending