Everyone looks forward to retirement, but it sometimes feels as though traps have been strategically placed for you to fall into. Here’s how to avoid them.
Much is written about the classic financial mistakes that plague start-ups, family businesses, corporations and charities, sometimes making us forget that classic financial mistakes have been known to plague retirees, too. Furthermore, we like to think that everyone is working toward retirement, meaning that finding solutions for the many missteps taken by retirees is arguably more pressing.
Calling them “missteps” may be a bit harsh, as not all of them represent errors in judgment. Many of these problems are faced by retirees across the world, even with heavy preparation; however, simple awareness of these potential pitfalls may help you to recover from them or avoid falling into them altogether.
Managing Social Security
Social Security benefits are structured to rise about 8% for every year you delay receiving them after your full retirement age. Is waiting a few years to apply for benefits an idea you might consider? Filing for your monthly benefits before you reach your full retirement age can mean comparatively smaller monthly payments [1]. A financial professional can help you find strategies to fund your lifestyle while delaying your Social Security benefit, potentially helping you achieve a greater benefit once you finally decide to file.
Managing Medical Costs
One report estimates that a healthy couple retiring at age 65 can expect nearly $208,000 in out-of-pocket medical expenses during the course of their retirement, even with additional coverage such as Medicare Part D, Medigap, and dental insurance. Having a strategy can help you be better prepared for medical costs [2]. It can also be a great idea to find a way to cover costs for services like long-term care, which you may think of as a medical expense; however, it’s actually a lifestyle expense, meaning that it is not covered by Medicare.
Understanding Longevity
Actuaries at the Social Security Administration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not only reasonable, but it should be expected [3]. Currently, longevity risk plagues modern retirees, possibly causing them to run out of money while still alive. That’s why it’s important to build funds and establish streams of incomes that last your entire life, no matter how long that may be.
Managing Withdrawals
You may have heard of the “4% rule,” a guideline stating that you should take out only about 4% of your retirement savings annually. Each person’s situation is unique, but having some guidelines can help you prepare. It’s also important to account for your lifestyle expenses, as your savings will need to be able to support that desired lifestyle. A financial professional who understands your circumstances and your goals can help you design a distribution strategy that helps you fund your dreams and make your money last.
Managing Taxes
Some people enter retirement with investments in both taxable and tax-advantaged accounts. Which accounts should you draw money from first? To answer the question, a qualified financial professional would need to review your financial situation so they can better understand your goals and risk tolerance. It can also be a good idea to convert funds to Roth accounts early in retirement when you stop collecting a salary, thereby helping you avoid hefty tax bills and RMDs later in your life.
Managing Other Costs, Like College
There is no “financial aid” program for retirement. There are no “retirement loans.” A financial professional can help you review your anticipated income and costs before you commit to a long-term strategy and help you make a balanced decision between retirement and helping with the cost of college for your children or grandchildren. If you’re a grandparent, you may even be able to set up a tax-advantaged account like a 529 plan that can offer tax benefits without impacting a student’s ability to secure financial aid.
To learn more about financial topics like how to avoid the pitfalls of retirement, you can reach Nautica Asset Management at 734-794-2775.
Sources:
- https://www.ssa.gov/benefits/retirement/planner/delayret.html
- https://hvsfinancial.com/wp-content/uploads/2020/12/2021-Retirement-Healthcare-Costs-Data-Report.pdf
- https://www.longevityillustrator.org/
This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your investment strategy for tax considerations.
