10 Financial Mistakes Retirees Make: Part 2

In our previous blog post, we revealed the first five of 10 common mistakes people make in retirement. In this blog, we pick up where we left off, providing the last five. If you haven't already done so, check out 10 Mistakes Retirees Make: Part 1

6. Failing to Communicate Retirement Goals

You and your spouse likely have different dreams, goals, and visions of what an ideal retirement looks like. This may go without saying, but being on the same page as your spouse on the financial front, is crucial as you transition into a new lifestyle.

7. Not Changing Investment Strategy to Fit Distribution Phase

In your working years, you are in what we call the accumulation phase. You are trying to build your assets as much as possible. When you retire, you enter into the distribution phase, where the primary goal is to maintain your lifestyle for many years, likely decades. The investment strategy shifts to a multifaceted approach that involves providing growth to offset inflation, generating current and future income, preserving and protecting your portfolio, and reducing volatility while ensuring you do not outlive your assets.

Some people who transition into retirement stay in accumulation mode in their mentality and with their investment strategy. This can get them into trouble because accumulating assets is often a more aggressive, growth-oriented investment approach, while distributing assets is typically a more conservative, income-oriented strategy. Accumulation investment strategies are more susceptible to swings in the market whereas distribution strategies are not as volatile. (For related reading, see: Should I Invest in Stocks During My Retirement?)

8. Falling for Financial Scams

Studies show the most susceptible group of people to fall for telephone, email or mail scams are individuals over 60. This is a $50 billion dollar industry and seniors are most likely to be targeted. Retirees are encouraged to purchase identity theft protection and perhaps attend a local class to learn about and recognize scams and how to protect against it.

9. Not Having a Good Tax Strategy

Tax minimization strategies involve knowing what accounts to withdraw from, how much to withdraw and when to do it. Tax minimization planning is complex when it comes to retirement accounts and ignorance to tax laws can cost you big time. An example of this is required minimum distributions (RMDs). The government requires minimum distributions on traditional IRAs and 401(k)s by the time you reach age 70.5. The amount is based on the balance in your account as well as life expectancy. Not taking the RMD means the government taxes what you should have taken out at 50%. If your RMD was $10,000 that year and you don’t take it, the government hits you with a $5,000 tax bill. Ouch!

Tax penalties are only one part of the equation, however. Tax opportunities and strategies are on the other side of the equation where careful planning can potentially save you thousands of dollars in the long run.

10. Being House-Rich/Cash-Poor 

Being “house-rich yet cash-poor” means you have a lot of equity in your home, but your costs associated with maintaining it are draining your monthly cash flow. In retirement, it may not be necessary to have so much house. And it might be advantageous to access the equity you’ve built in the house to help fund your retirement goals. When retirees put all their options on the table, perhaps it makes sense to downsize.

It makes sense to look at the options available, taking into account your unique retirement goals, and finding a way to bring these things two things together. This can often be a tough decision to make as selling the family home can bring forth many emotions and sentimental feelings for families.

(For more from this author, see: 5 Things to Do in Your 20s to Retire in Your 50s.)