When you are just starting out in your working life, or even when you’re in the middle, you obviously don’t want to make costly financial or investment mistakes. However, if you do, you’ll generally have time to recover from most of them. But when you’re entering retirement, or you’ve been retired for a while, you clearly have less margin for error. That’s why you’ll want to do everything you can to avoid some of the mistakes made by retirees.
What, exactly, are these missteps? Here are a few of the more serious ones:
· Not investing for growth – You can reasonably expect to live two or even three decades in retirement. And during all those years, inflation, even if it’s relatively low, will be eating away at your purchasing power. For example, suppose you start out with $1,000. If we experience even a 4 percent inflation rate for the next 15 years, the purchasing power of your $1,000 will shrink to just $549. So, just to break even, you’d need your investments to earn at least 4 percent.
Unfortunately, many retireees overlook the impact of inflation, and, as a result, they invest too conservatively. It’s easy to understand why this happens; nobody wants to lose part of their retirement savings to the ups and downs of the market. And yet, even in retirement, you should consider an appropriate portion of your portfolio for growth depending on your risk tolerance, time horizon, and goals. How? By looking for high-quality stocks – those with strong earnings records, solid management and competitive products. Of course, even these stocks will fluctuate in value and are subject to market risks, but if you make them part of an investment mix that contains bonds, CDs and government securities, you can go a long way toward smoothing out your portfolio’s overall volatility. Remember, though, diversification does not protect against market loss.
· Underestimating expenses – Many people assume, almost reflexively, that their expenses will drop drastically during retirement. But that’s just not true. While some work-related expenses may indeed go down, other costs will fill the void. You may decide to travel, remodel your home, buy a vacation home – the list is endless. Also, as you move further into retirement, your medical costs will almost certainly rise. If you do underestimate your living expenses, you may be forced to dip into your savings and investments more than you’d like. Furthermore, you might have to increase your taxable retirement-plan withdrawals – a move that could bump you into a higher tax bracket. The solution? Put a realistic ”price tag” on your retirement – well before you retire.
· Withdrawing money from the “wrong” source – By the time you retire, you will have probably accumulated sizable sums in both taxable accounts (stocks, bonds, etc.) and tax-deferred accounts (IRA, 401(k)). When you start taking the money out, you may want to withdraw funds from the taxable accounts first, so you can let your tax-deferred accounts continue the opportunity for growth as long as possible.
· Taking 50 percent late withdrawal penalty – Sooner or later, you’re going to have to take withdrawals from your traditional IRA or your tax-qualified retirement plan, such as a 401(k) or 403(b). If you don’t start taking required minimum distributions (RMDs) once you reach 70 1/2, you’ll be penalized 50 percent of what you should have taken, plus ordinary income tax. However, at least in the case of your IRA, you do have a possible escape clause from taking RMDs. By converting your traditional IRA to a Roth IRA prior to age 70 1/2, you’ll have to pay taxes at the time of the conversion, but you won’t have to take RMDs.
To avoid these and other problems, you may want to work with a financial professional, so that you can develop a plan that spells out, among other things, how much you’ll need to accumulate for your chosen retirement lifestyle and where the money will come from. By taking action early, you can put yourself in position to enjoy all the possibilities that retirement offers.