Most people realize that retirement savings can be negatively impacted by the loss of a job, divorce or death. But just as much damage can be done to your retirement nest egg due to more subtle mistakes. Here are ten common mistakes that could prevent you from reaching your retirement goals.
- Not having a plan – Participating in your retirement plan at work and opening an IRA is not a plan. Many individuals never map out how much money they will need to meet their goals. Successful retirement savers figure out what they will need, define a savings goal, and identify a plan to reach that goal. They focus on asset allocation and let it be the driver versus market timing.
- Holding concentrated positions – It is not uncommon for investors to accumulate a large position in their employer’s stock only to see it suffer a big downturn shortly before retirement. This happened in 2008 and forced some to delay their retirement plans. A concentrated position can represent a significant risk. Systematically selling concentrated positions well before retirement can help reduce that risk.
- Investing too little in stocks – Whether due to the old rule of thumb (100 minus your age is your percentage allocated to stock) or just fear of losing money, many end up underinvested in equities. It’s not uncommon to spend a third of your life in retirement. Don’t let up on the gas too early because going too conservative in this low interest environment can be costly.
- Being unrealistic – Retirement savers can often overestimate their potential return or underestimate their spending in retirement. Be realistic about what you can earn on your retirement savings and how much you will need to comfortably retire. In the early retirement years, many people spend more due to traveling and an active lifestyle so make sure to factor that in.
- Being too generous – While it’s hard to say no, you don’t want to erode your retirement savings by being too generous with your adult children. Think carefully about how much you can afford to contribute toward the down payment on a house, a lavish wedding, or even paying for recurring expenses like cell phones or insurance. Remember, no one is going to give you a loan for retirement.
- Having a mortgage in retirement – Entering retirement with a large mortgage can eat away at your nest egg. Thirty years ago, 25% of homeowners in their late 60’s had a mortgage. Today, nearly 50% do! Also, downsizing your home at or before retirement can be a great idea. It can cost you less and be easier to maintain.
- Underestimating health care expenses and long-term care needs – Supplemental health insurance policies like Medigap or long-term care insurance can be significant expenses. However, as with any insurance, it’s important to budget for adequate coverage to insure against an even costlier risk. Choosing to not buy the insurance doesn’t make the risk go away.
- Underestimating life expectancy – Assuming a life expectancy of 95 as part of a financial plan is not only realistic, it’s increasingly more common. Even if you’re not in the best health and longevity isn’t in your family, plan as if you will need your resources to last that long. You never want the success of your retirement plan to be contingent on you dying younger.
- Failing to understand tax rules – Tax mistakes can eat up a chunk of your retirement savings. For example, some retirees leave employers and take a lump sum from a retirement account instead of rolling it into an IRA. Those who do this may end up paying income taxes and possibly a 10% penalty as well. You can lose up to 50% to taxes and penalties.
- Not following distribution rules – In the year you turn 72, (previously 70 1/2) you are required to begin taking distributions from your retirement accounts. The consequences of not doing so are costly. Failure to take a Required Minimum Distribution (RMD) results in a penalty of 50% on the amount you failed to withdraw.
A good financial plan and working with a professional can help you avoid these and other costly mistakes. Take time to properly plan so you can stay on track for your retirement goals. That will give you peace of mind for your retirement.
The Wolfe Kobes Group
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