If you are like most people, retirement is something that is on your “Definite List”. In other words, “I definitely want to retire someday”!
And why shouldn’t you want that? You’ve worked for many years and you deserve to hang it up.
Unfortunately, simply working for many years doesn’t guarantee you a successful retirement. A successful retirement plan is coordinated through a commitment to plan, a commitment to save, and a commitment to evaluate and evolve the plan through your working and your post-work years.
In addition to that commitment, a successful retirement plan may avoid several of the most common blunders that I see many people make. Any one of these blunders could negatively impact your retirement and the combination of more than one may leave you even further behind.
Let’s take a look:
Getting Too Safe With Your Investments, Too Soon
Retirement is as good a time as any to review your investment allocation. In fact, one of the biggest questions retirees ask is, “How should I investment my money in retirement”?
For years leading up to retirement, retirees are in the accumulation stage. During this stage, it may be appropriate to have a larger allocation to equities in your portfolio which usually generates higher returns. However, what works during the accumulation stage (while you are working) may not work during the distribution stage (when you retire).
Historically, the financial planning industry has relied on rules of thumb regarding investing during retirement. One such rule of thumb is your age in bonds (example, a 70-year-old should have 70% allocated to bonds)
As people are now living longer, the risk of running out of money may also be increasing. If you allocate too much of your investments, too early, in too safe of an instrument, will it earn enough to last a lifetime? Whether that safe instrument is bonds or cash, there may be a risk of getting too safe too soon.
Other such planning strategies to consider include the bucket strategy, a fixed allocation based on your risk tolerance and risk capacity, and a newer strategy that evaluates the concept of increasing your equity exposure as you move into retirement.
So what is the right answer? There may be more than one. The right answer may depend on how much money you have, your other income sources, your tax bracket, and your expected lifestyle (to name just a few).
Locking Up Your Money
As retirees shift from the accumulation stage to the distribution stage, they often ask this simple question: “Where is my money going to come from”?
A big shift happens for retirees. They go from an earned income that may pay regularly, to an unknown payment schedule. “I am no longer working, so where is my money coming from”? Uncertainty over this question can be very difficult to overcome. The good news is that the solution to this common question could be easy.
Often, the first and second sources of income (if eligible) are from Social Security and an employee-earned pension. These income sources are typically paid once per month and are deposited directly into a named bank account.
However, these income sources are not always enough to meet the monthly living expenses of a retiree. For that reason, retirees may be required to withdrawal from their investment accounts to meet their needs.
This is where the “locking up your money” risk potentially rears its ugly head. The risk may occur if a retiree ties up all their money in investments that restrict access (known as liquidity risk). Certain annuities, guaranteed income sources, non-traded REITs, limited partnerships and other investments may limit access to your money when you need it, or you may be forced to pay a surrender charge. It’s highly important, when selecting an investment, to know when you can access some or all of your money, and under what withdrawal conditions.
The last thing you want during your retirement is to be restricted from getting your money when you need it most.
Not Paying Attention to Social Security
Generally, Social Security benefits for a retiree can start as early as age 62 and as late as age 70 (70 is the age at which your benefit would max out and it may not make much sense to wait any longer). However, when is the right time to start collecting? That answer is different for everyone.
Here are some things to consider:
- If you start early, your benefit may be reduced – If you are working and collecting before your full retirement age, your benefit may be reduced accordingly.
- You start to get 100% of your benefit at your full retirement age – Yes, you can start collecting at 62, but your benefit will be reduced. Do you want your full benefit? Then you should wait until your full retirement age (for many, this is between 66-67).
- Your benefit can increase by 8% – Your benefit grows by 8% per year every year that you wait past age 66.
- If you are married, you have additional options – Married couples have additional options, including spousal benefits and survivor benefits.
- Divorced couples may have options – If you are divorced and not remarried, you may be eligible for benefits based on your ex’s benefit.
- You should consider taxes too – Social Security may or may not be taxed, based on your total income. You may want to consider your income tax-planning options when evaluating your schedule to start Social Security*.
- Do you have other money – Sometimes, the decision to start Social Security is easy, namely if you have no other income or assets to access. At other times, the decision of whether to use you own money and delay collecting Social Security or starting Social Security early is a difficult one that may involve detailed analysis.
As I have written before, I love Social Security. It’s such an important piece of the financial planning and retirement-planning puzzle. For many, the value of Social Security is their single largest asset. As such, a big piece of the financial planning puzzle is one area you want to get right.
Understanding Social Security and what you’re entitled to may mean a difference of thousands of dollars. You want to be sure that you understand all the available options.
Not Considering the Impact of Longevity
I have no idea how long I am going to live. Statistically, I could pull the actuarial tables from the Social Security Administration and calculate the average. Unfortunately, this information is nearly useless for retirement-planning purposes. When completing a retirement plan, I can’t strictly depend on the average. What if I live longer?
The same goes for you. What if you live well past what your “average age” expectation may be? What if you live until your 90’s—or beyond?
A sound retirement plan may consider the impact of you living to your expected retirement age, and several ages well beyond that. Often, we run retirement simulations that take clients to age 95, 100, and beyond.
While the probability of living that long might be small, it’s important that you understand the possible impact on your plan. What if you don’t plan to live that long, but you do, and then you run out of money? It may be hard to go live with your family at 97 when they’re well into their 70’s…
Not Considering the Impact of a Premature Death
Have you considered what will occur if you die earlier than expected? Or what if your spouse dies early?
While it may not matter to you, it does matter to the surviving spouse.
When reviewing retirement plans, I see retirees who are fortunate enough to have a substantial pension, in addition to Social Security income. Sometimes the pension is from one family member who has worked for many years, and at other times, it comes from both spouses.
The question that needs to be asked is, “What happens to those income sources when one person dies”? Do these income sources continue to be paid to the surviving spouse? Or do they go away?
When selecting a pension or annuity income, you often have several choices. The choice that pays the highest amount is known as a single life annuity. This means that when you die, no survivor benefit is paid out. The payments end.
Other, potentially more prudent options, may mean selecting a lower monthly payment that offers a guarantee that the surviving spouse will receive something, sometimes 50%-100% of the benefit, after the death of the first spouse.
Social Security, for one, changes when one spouse dies. The surviving spouse has an option:
- Continuing with their own benefit, or
- Foregoing their own benefit and stepping into their deceased spouse’s benefit, if higher.
Either way, a portion of the family income is lost.
Retire Just Because You Reach 62
Yes, you can begin collecting Social Security at age 62.
However, this may not mean that you’re ready, financially, to pull the trigger on retirement. Just because you reach 62 and can collect Social Security doesn’t necessarily mean that you should walk into your boss’ office and hand in your resignation.
Before doing anything that dramatic, you may want to run retirement simulations, talk to family and friends, and evaluate what your retirement will look like (in a perfect world, you could test-run retirement. This could mean living off a retirement budget and spending some time living in your retirement home. This could allow you to see if you like it as much as you think you will). Working a few more years not only increases your social security benefit, but may also increase the number of years you are saving. It may also decrease the number of years you are withdrawing from your investments during retirement.
In fact, working a few more years may significantly improve how much you can spend during retirement. In short, don’t focus on retirement just because you reached 62; focus on retirement because you can afford it, have other hobbies and interests, and are genuinely excited about starting the next chapter of your life.
Not Planning at Least 5-10 Years Before You Pull the Trigger
The best time to start planning for retirement is as early as possible. In fact, starting to plan in your 20’s can lead to a significantly higher investment bucket come age 60.
Unfortunately, most people don’t start seriously considering retirement until they can see it on the horizon. Hopefully, that view comes into focus ten years before you retire.
The good news, however, is that I could argue the 10 years prior to retirement are the most important 10 years. In these final 10 years, you’ll be able to “catch up” in your 401(k) by contributing an additional $6,000 per year. Also, expenses associated with children and your household may be decreasing. I encourage you to resist the urge to finally take that trip you’ve been putting off and instead increase your savings. Finally, using the rule of 72, you can see that your investments may double in value in the final 10 years, assuming a 7% rate of return.
Take advantage of these 10 years by evaluating where you stand in regards to your retirement goals, what changes need to be made, and actively allocate your time and resources to meeting those goals. Taking the time now will prevent you from finally reaching 60, only to realize that you may not afford to retire.
Get Yourself Into Retirement-Planning Mode
As you can see, retirement planning may be full of potential landmines. Some of these landmines are easy to avoid, while others require more attention.
In order to be sure that your retirement plan is getting the attention it deserves, you should be sure to take the time to ask yourself the right questions. If you don’t know which questions to ask or where to find the answers, it may make sense to find a qualified financial advisor who can help you meet your goals.
* Tax services are not offered through, or supervised by, Capital Analysts or Lincoln Investment.