Retirement planning should always start at an early age in order to take advantage of compounding interest, but the costliest mistakes are often made in the final stretch. After spending decades working towards a goal, too many people set themselves back with an easy-to-avoid mistake.
In this article, we’ll take a look at the most common retirement mistakes and how they can be avoided by making plans well in advance.
1. Moving without knowing the place
Many people move to a new state once they retire. Maybe it’s for a lower tax rate, a better climate or to be closer to family. Unfortunately, moving is expensive and some find out the hard way that they don’t actually like their new home. Valerie Rind, author of Gold Diggers and Deadbeat Dads, recommends giving the new place a lengthy trial before committing yourself.
“If it’s a vacation area, see what it’s like in the off-season when the tourists are gone,” she said. “Once you decide to relocate, rent a place for at least a year. Get a good feel for the area before you jump in and buy a property in your new hometown.”
2. Ignoring interest rate arbitrage
Conventional wisdom is to reduce expenses ahead of retirement years by paying off home loans or other debts. While doing so could definitely lower costs during retirement years, the costs may significantly outweigh the benefits. The difference in interest rates between investment returns and mortgage costs is to blame for the disparity—and failing to calculate these differences can cost thousands of dollars during retirement years. (For more, see: How to calculate what you need for retirement)
For example, suppose that a retiree has a home loan with a 4% interest rate and an investment portfolio that has returned 7% over the long run. The retiree risks losing out on the 3% return (the 7% investment returns minus the 4% loan interest rate) over the remaining period of the mortgage. In addition, the retiree would lose ancillary benefits like the mortgage interest tax deduction that could save him or her additional money over the life of the home loan.
3. Waiting to buy insurance
Long-term care tends to be a lot more expensive than most people imagine—or budget for in their retirement savings. On average, living in a nursing home can cost upwards of $80,000 per year for a semi-private room and more than $90,000 for a private room, according to Genworth Financial. These costs are only accelerating over time with an average annual growth rate of 4% over the past five years—costs that could crack a nest egg rather quickly.
Most financial advisors recommend purchasing long-term care insurance between 53 and 54 years of age in order to receive the highest benefit for the premiums paid. If retirees put off this kind of insurance, rates can dramatically increase in relatively short order and make it a lot more expensive to receive care. Retirees should also factor in their overall health when assessing whether or not they need insurance and how much it might cost.
4. Not knowing how to spend your time
Knowing how you need to spend your money in retirement is important, but it’s also vital to know how you want to spend your time. Working can take up more than half of our waking hours, and many people are surprised to find they aren’t sure what they want to do once they clock out for the last time.
To avoid this dilemma, CFA Joseph Hogue of My Work from Home Money said he recommends taking time before retirement to find a hobby or side job that you enjoy. “One of the most common retirement mistakes is simply that people assume they will be happier in retirement,” he said. “A lot of people spend their working lives dreaming of retirement when it's not really retirement they want, but a job they can enjoy and more control over their work.”
5. Missing Medicare deadlines
CFP Melissa Sotudeh of Halpern Financial said some retirees face higher Medicare costs because they miss important deadlines. “If a retiree is not yet taking social security benefits for whatever reason, it is up to them to contact Medicare three months before their 65th birthday,” Sotudeh said.
This is just one example of a litany of potentially forgettable deadlines. Those over age 65 with access to Medicare who are still working need to figure out if their other form of health insurance will be their primary or secondary form of coverage. “Otherwise, you may not be qualified for the Special Enrollment Period and will have to pay penalties going forward,” she said.
These questions may seem confusing, but figuring them out later may cost you extra in penalties. You may even be denied coverage for Medigap for waiting too long.
6. Treating social security as an afterthought
Many people treat social security as an afterthought, opting to take the full distribution as soon as they reach the requisite age. While this may generate immediate income, the break-even age for social security is the low 80s, which means that those expecting to live longer may want to consider waiting to take distributions. Those that don’t expect to live long, on the other hand, may want to consider taking distributions immediately.
For example, suppose that a retiree was born in 1944 and reached full retirement age at 66 and delays taking any distributions until age 70. The retiree could receive a credit of 8% times four (the number of years that they waited), which means the total benefit could be 32% higher than what they would have received at age 66. In order to help with these calculations, the Social Security Administration provides a number of calculators.
There are as many ways to screw up your retirement as there are ways to save. Thankfully, many mistakes are small and easy to recover from. Avoid the common mistakes listed above, and chances are your golden years will be smooth sailing.