Our clients want to be assured they will be able to achieve their retirement goals. One important part of that process is knowing what not to do. I’ve compiled a list of the top 10 mistakes people have made as they approach retirement. To start, we’ll look at the top five.
1. Not Accounting for Inflation in Your Income and Expense Projections
It is very difficult without the expertise of a certified financial planner (CFP) or true financial planning software (not a glorified Excel spreadsheet) to illustrate the impact inflation will have on your retirement. I have found that most people who are going at it alone, and even some who are working with an advisor, do not account for inflation, which is a big mistake. Please keep this in mind, with only a 3% inflation rate you lose about a third of your purchasing power in just 10 years. So the longer your retirement the bigger the impact it will have.
2. Not Considering Longevity Risk in Your Overall Retirement Plan
Unless you have extenuating circumstances or certain medical conditions (e.g. terminally ill, etc.) it is extremely risky to assume you will only live to a certain age when the mortality tables indicate otherwise. It has been said, the good news is people are living longer and the bad news is people are living longer. If you consider someone who is retiring in their early 60s, they may be looking at a 30- or 40-year retirement horizon. This means they may be in retirement as long as they were working. In fact, this year most of the major life insurance companies have adopted the most recent mortality tables into their offerings to reflect this fact. (For related reading, see: Retirement in an Age of Longevity.)
3. Taking Too Much Market Risk With Your Investments
This is always an interesting one as I have noticed investors want to be aggressive when the market is going up and they want to be conservative when it is going down. Unfortunately, no one has a crystal ball (including myself), so trying to time the market is a very bad idea. I would contend you should only take the amount of risk you are comfortable taking, no more, but in some cases, maybe less. Risk tolerance has to do with how you feel so there is no right or wrong. I find most people are unaware of how much risk (downside exposure) they even have. If you asked people who retired just before the last financial crisis (October 15, 2007–March 2, 2009) I am sure they would agree. Make sure your investment portfolio always matches your risk comfort level at all times.
4. Not Properly Accounting for the Impact Taxes May Have in Your Retirement Years
I know we can’t predict the future, however, I think most people would agree with the statement that taxes will most likely continue to increase, especially considering our huge national debt. People are told their tax rates will be lower in retirement than they were in their working years, I was even taught this when I first started in the business. I can tell you this isn’t necessarily true. Many people who are retired will tell you that since their house is paid off and they don’t have dependent children living at home anymore they don’t have the deductions they used to have, which can affect their taxable income rate. We believe tax planning is more important now more than ever. (For related reading, see: 5 Tax(ing) Retirement Mistakes.)
5. Not Consolidating Your Financial and Investment Accounts
There is something to be said for keeping things simple, especially when you are retired. It can be a full-time job to manage where and what you have if you have accounts with multiple institutions, which is why it is important to consolidate when you can. You can’t combine your IRA with your spouse's but if you have a few IRAs, maybe a 401(k), etc. you can usually combine those into one single IRA (please see a qualified CPA/tax professional before doing so). This is especially true when you reach the age of 70.5 and need to start taking their required minimum distributions (RMDs). One of the many benefits of working with a financial planner is they can simplify your life by keeping things simple, so you can enjoy your retirement years doing the things you enjoy. It makes your surviving spouse's and your children’s lives easier when that time comes as well.
(For related reading, see: Managing Income During Retirement.)
Silverman + Associates Wealth Management, LLC is a Registered Investment Adviser. Information presented is for educational purposes only and does not intend to make and offer or solicitation for the sale or purchase of any specific securities product, service or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified adviser, tax professional or attorney before implementing any strategy or recommendation discussed herein.