Avoiding 8 Big Mistakes in RetirementSubmitted by Desmond Wealth Management, Inc. on December 4th, 2017
Tens of millions of Americans are looking forward to the day they retire. Others enjoy their profession and can’t imagine a life without work. Yet, even those folks recognize that one day they won’t wake up on a Monday and head into the office.
In either case, they share a common goal—a comfortable retirement that doesn't force them into a drastic lifestyle change. While we admit it’s a well-worn cliché, a failure to plan is another way of saying that you are really planning to fail.
Fortunately, we can confidently and humbly say that those who utilize our guidance aren’t in that category. Many of you whom we work with on a regular basis have set financial goals, or are comfortable with your monthly retirement income.
As we’ve done in many of our monthly newsletters, we want to take a step back and talk about the basics or the fundamentals, and review important mistakes that retirees sometimes make.
Experience isn’t always the best teacher. Many times, someone else’s experience is. If we can avoid common pitfalls, we can sidestep costly mistakes and reduce the stress that can sometimes accompany retirement.
8 RETIREMENT MISTAKES TO AVOID
1. Falling prey to scams. Sadly, scams are proliferating in today’s tech-driven world. They are just a mouse-click away. One must always be on guard. That is why we are leading off with a warning about fraud.
We recently came across an article that illustrated how home buyers were being scammed out of their down payment. Long story short, a buyer unsuspectingly receives and acts on fraudulent wire instructions from hackers who have hacked into the computer of their real estate agent. The hackers are posing as their agent.
Unfortunately, the seller rarely has any recourse, losing both home and cash.
We provide this illustration because the criminal mind is only limited by creativity. Scams, including investment scams, come in multiple forms.
If you believe an alternative investment might be worth considering, but lack of expertise prevents you from formulating the right questions, we promise we’ll provide you with a fair and objective assessment.
We don’t want you to be taken by con artists. We don’t want you to go through the pain of being victimized. We’ve seen it before and it breaks our hearts.
2. Be careful not to drain your savings too quickly. Once you retire, there may be the temptation to shift spending toward new hobbies or travel. Unless you have substantial reserves set aside, spending too much too soon could create unwanted stress and exacerbate worries that you might outlive your retirement.
Set up a budget and look for ways to trim expenses without a significant change in lifestyle. We know a retiree who financially is in great shape. For much of her life, she’s shopped at Goodwill for her clothes and still enjoys “finding deals,” as she puts it.
Simple changes can sometimes yield substantial savings.
3. House rich and cash poor. If you own your home, might it be time to downsize? You can lower your utilities, maintenance, property taxes, insurance, and more by moving into a smaller home that doesn’t appreciably impact your lifestyle.
Equity that remains can supplement savings.
4. Failing to take health care into account. Medicare doesn’t cover everything, and long-term care expenses may eventually crop up. With some appropriate adjustments, we can make sure you are aware of your options and plan accordingly.
5. An investment mix that is too aggressive or too conservative can come back to haunt you. As you near or enter retirement, the more aggressive posture that served you well may no longer be appropriate. It goes without saying there may not be the time to make up unanticipated market losses, especially if you are forced to liquidate to cover normal or unexpected expenses.
Conversely, getting too conservative in retirement can put unwanted constraints on your portfolio. The danger—your investments lack a component geared toward appreciation, creating the risk you may outlive your money.
While time-tested principles can guide us, each situation is unique and we can assist you in finding the right balance.
6. Claiming Social Security too soon could be an expensive proposition. It may be tempting to file for Social Security when you reach 62. However, did you know that you will reduce your monthly benefit by 25% by not waiting until full retirement—now 66 years of age?
Every year you delay past full retirement age increases your monthly check by 8%, until you reach 70, where you’d receive another 32%. Plus, annual cost of living adjustments are based on your current benefits. So, if you delay, you will not only receive a larger monthly check, but the annual cost of living increases will be based on the larger base amount.
Of course, many factors determine when it’s best to claim your benefits, including life expectancy.
Married couples have several options that are not available to those who are single. Let's also not overlook spousal benefits, which may be eligible for those who are divorced.
Social Security offers many options and strategies. If you are so inclined, let’s talk and see what may work best for you.
7. You can’t ignore taxes. Most of you will see your marginal tax bracket drop in retirement, but some seniors may be in for a rude awakening when they file.
Many are aware that IRA or 401k distributions are taxable, but sometimes fail to adequately prepare when they take distributions.
The same holds true for interest, dividends, and capital gain distributions from mutual funds. In addition, some folks are surprised to find that Social Security may be subject to taxes.
If you file as an individual and your combined income (adjusted gross income + nontaxable interest + ½ of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If the total is more than $34,000, up to 85% of your benefits may be taxable. For married couples, raise the numbers to $32,000-$44,000 and $44,000, respectively (SSA.gov Benefits Planner: Income Taxes and Your Social Security Benefits).
Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam, but preparation can reduce the tax bite. Proper planning can also eliminate surprises at tax time.
As always, we're happy to assist.
8. Leading a sedentary lifestyle. For some individuals, working and socializing go hand in hand. When they retire, they inadvertently disconnect from the world. Don’t let this happen to you!
Stay active and exercise as you are able. Have you considered a senior aerobics class or other low impact exercises? Talk to your doctor. He or she will be thrilled to recommend a plan.
Stimulate your mind. Some like to read, others enjoy puzzles or brain teasers. You might consider an online class. I know of one retiree in her late 70s who is now taking piano lessons.
What is your passion? Now is the time to volunteer. Local organizations or your church can point you in the right direction. As a bonus, it will open up avenues for new friendships.
This isn’t an all-inclusive list. It’s not meant to be, but avoiding common mistakes will reduce your stress and help you get the most out of your retirement.
Changing gears—upward march in stocks
No question about it—for those who have invested in a well-diversified equity portfolio this year, you have been handsomely rewarded.
Of course, we rarely recommend diving into a portfolio that’s 100% invested in stocks, unless you are young and your tolerance for risk is high.
When markets get volatile, those who are 100% invested will see the biggest declines. Simply put, other asset classes help reduce volatility and put you on a straighter path toward your goals.
The tailwinds that have driven stocks over the last year, and for that matter, over recent years, remain in place.
Economic growth in the U.S. has been quite resilient, even in the face of devastating hurricanes.
The U.S. Bureau of Economic Analysis reported at the end of October that Gross Domestic Product (GDP) expanded at an annual pace of 3% in Q3. It’s the second-consecutive quarter of GDP growth that has met or exceeded 3%. The economy hasn’t experienced that since 2014.
It’s not simply just what’s happening at home; we’re witnessing an acceleration in economic activity around the world.
One byproduct for investors—solid corporate profit growth. It’s a key factor in the stock market equation.
Throw low inflation and low interest rates into the mix and the S&P 500 Index set 11 new all-time closing highs in the month of October (St. Louis Federal Reserve data).
|Dow Jones Industrial Average||+4.3||+18.3||+10.4|
|S&P 500 Index||+2.2||+15.0||+8.5|
|Russell 2000 Index||+0.8||+10.7||+8.6|
|MSCI World ex-USA**||+1.3||+18.0||+2.9|
|MSCI Emerging Markets**||+3.5||+29.8||+3.3|
|Bloomberg Barclays US Aggregate Bond TR||+0.1||+3.2||+2.4|
We have never favored market timing as a strategy. You know, hoping to sidestep the inevitable declines and get back into stocks prior to the inevitable upswing. It’s simply not possible to accurately and consistently predict the future. We know that seems obvious, but it must be said.
Our approach has always been a time-tested strategy that is based on the historical data that takes the bumps in the road into account.
We won’t venture a guess as to how markets may perform next year or through the remainder of the decade, but we’ll participate in the upside and use various evidenced-based strategies that will mitigate, though not eliminate, the downside.
History tells us this has been the best path to wealth accumulation and obtaining your goals.
If you have any questions, comments, or concerns, we’d be happy to discuss them with you. We're simply an email or phone call away, and can be reached at firstname.lastname@example.org or (925) 932 - 1994.
As always, we're honored and humbled that you have given us the opportunity to serve as your financial confidant and advisor.