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15 Financial Mistakes To Avoid When Planning For Retirement

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You and your spouse have been planning for retirement for many decades, and now the time is here! While you’re crossing off items on your Bucket-List, it’s important to avoid certain financial mistakes that can ruin your retirement plans. The following are 15 financial mistakes to avoid during retirement.

Mistake 1: Taking Social Security Too Early

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You can start taking your Social Security retirement benefit as early as age 62, or wait until as late as age 70. A study done in 2015 showed that 33% of men and 40% of women chose to retire as soon as they were eligible. While the idea of retiring at age 62 might be appealing, it’s important to note that the age you start collecting Social Security affects your monthly benefit amount for the rest of your life.

Why This Is a Mistake

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Even though you might be eligible to start taking your benefits at age 62, waiting until you’re 65 to 67 – your full retirement age, depending on when you were born – results in a monthly benefit amount that is almost 30 percent higher than you would earn at age 62. Your benefit amount will max out if you wait until age 70, and be an additional 32 percent higher than at your full retirement age.

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Also, if you start collecting Social Security before your full retirement age, any earned income above $17,040 (for 2018) will result in a reduction of $1 of your monthly benefit for every $2 of income above that limit.

To receive the maximum amount of your Social Security benefits, continue to work for as long as physically possible.

Mistake 2: Not Meeting With a Financial Planner for Retirement Help

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Many people are financially unprepared for retirement, but don’t want to take the time – or pay the money – to meet with a financial planner to help them get ready for retirement.

Why This Is a Mistake:

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This is the only retirement you’re going to get! Don’t let your reluctance to pay a financial planner deter you from getting the help you need to plan for retirement. A financial planner can help you form a retirement income strategy based on your anticipated Social Security benefits, your pension, and your tax-deferred retirement accounts.

It’s best to imagine several different scenarios for your life in retirement, such as staying in your present home for the long-haul or relocating to that fishing village in Florida you’ve had your eye on for twenty years. Your financial advisor can help you figure out how to handle your finances no matter what path you end up taking.

Mistake 3: Not Creating a Retirement Budget

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A recent study found that 33% of retiring Baby Boomers and more than 40% of the rest of the American population have saved less than $10,000 for retirement. These facts make it all the more important for you to work to full retirement age and sit down with a financial planner to make sure your savings will actually last.

Why This Is a Mistake

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Even if you think you have enough money saved to retire at age 65, it’s imperative that you take the time to make sure everything will really add up.

Establish a budget for your desired retirement lifestyle. Are you planning to spruce up the old homestead and stay put, or will you move to Arizona and make jewelry for the rest of your life? How much will your chosen lifestyle cost each month? Have you set aside enough financial resources to fund this lifestyle?

If not, you will need to rethink your plans for retirement. Perhaps you need to stay in the workforce until age 70 or scale back on your beading plans. A budget helps you get a handle on where you stand financially and lets you know for certain that you’ll be fine in retirement.

Mistake 4: Not Factoring in the Impact of Taxes on Retirement

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Now that you’ve retired, it’s easy to forget about all the different taxes you still have to pay, from income tax on your pension and other retirement revenues, to property taxes, and even, in some cases, your monthly Social Security check. You need to make sure you’re taking advantage of all the different ways to cut down your taxes in retirement.

Why This Is a Mistake

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Paying taxes is an unpleasant reality in retirement. Withdrawals from IRAs and 401ks are taxed at ordinary income rates. Social Security can be taxed, based upon your income. Pensions are usually taxable, but some types of pensions may be exempt from state income tax. Annuities are taxable as well.
However, if all the rules have been followed, a Roth IRA is not taxable, and a Roth 401k can be rolled into a Roth IRA to be exempted from taxation, too.

Most of us need the help of a financial planner to figure out all the ins and outs of taxation during retirement. Taxes need to be figured into any retirement budget.

Mistake 5: Not Planning for Healthcare Costs

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It’s easy to minimize or forget about healthcare costs when planning for retirement, especially if you don’t have any current health problems. Other variables, like where you’ll live and what you plan to do with your life, can seem more important. But the rising cost of healthcare should be considered in any realistic retirement plan. Health happens.

Why This Is a Mistake

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A study done by Fidelity estimated that a couple retiring in 2017 would need $275,000 to cover healthcare costs in retirement. Even for a lucky couple with a $1 million-plus nest egg, this is a significant amount of money.
For those still working, a health savings account (HSA) is a great way to build up a nest egg with pre-tax money that can be withdrawn tax-free in retirement for qualified medical expenses.

For those already in retirement, your savings will have to cover the healthcare costs not covered by Medicare. Your savings need to cover both short-term medical expenses and long-term care.

Mistake 6: Ignoring the Impact of Inflation

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According to Statista, inflation will range from 2.18 to 2.64 percent over the next several years. Even though this rate seems minimal, it definitely affects how far your dollar will go. Money held in fixed savings accounts will lose value over time.

Why This Is a Mistake

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Inflation is the retiree’s worst enemy, especially given the previous statistics and the fact that we’re living longer. Your purchasing power will be cut in half in 24 years.
Here are a few things you can do to alleviate the worst of inflation’s impact on your retirement finances:
• Plan conservatively for inflation while anticipating higher healthcare costs.
• Be prepared to adjust spending and retirement account withdrawals.
Invest aggressively enough to stay ahead of inflation.

Mistake 7: Not Investing Aggressively Enough

Nobody likes the idea of outliving their money. Therefore, it is not a wise financial decision to stop investing or cash out on all of your current investments once you reach retirement age.

Why This Is a Mistake

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According to the Society of Actuaries: “A 65-year-old man has a 41 percent chance of living to age 85 and a 20 percent chance of living to age 90. A 65-year-old woman has a 53 percent chance of living to age 85 and a 32 percent chance of living to age 90. If the man and woman are married, the chance that at least one of them will live to any given age is increased.”

Your money needs to continue to grow in retirement. Taking into account the impact of taxes, health care costs, and inflation on your retirement resources, you can’t afford to be too conservative in your nest egg portfolio. The key to a good retirement investment strategy is diversification, which means investing in all asset classes: stocks, bonds, real estate trusts and more.

Mistake 8: Selling Your Home Too Soon

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Now that you’ve retired, you’re trying to figure out how best to grow your nest egg. If your home is your largest asset, you may be considering selling it right away!

Why This Is a Mistake

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You must consider your local housing market before putting your home up for sale. If you live in a city where home prices are on the rise, this may indeed be the right time to sell your home. But if home prices are declining in your area, you may want to hold off for a year or two.

One way to deal with the dilemma of a bad housing market and your desire to move to that fishing village in Florida is to rent your house to tenants for a year while you practice your deep-sea fishing. The additional income will cover your housing expenses in Florida while the real estate market rebounds in your home area.

You have some time now to relax and think about things before making huge decisions. Seize the day – one day at a time!

Mistake 9: Going on a Spending Spree

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Now that you’ve finally retired, it may be tempting to cut loose and “live a little,” whether it’s by splurging on clothes or vacations, remodeling the kitchen, or building a Man Cave. These are luxuries you feel you’ve earned after so many years of hard work. What could be wrong with that?

Why This Is a Mistake

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Spending the money you haven’t budgeted for is the fastest way to find yourself in the most distressing situation imaginable: eating away your retirement savings quicker than anticipated and outliving your money.

The answer to this dilemma is simple: include affordable vacations, reasonable home renovations and other luxuries into your long-term retirement budget. If you find that the Man Cave or the Hawaiian vacation cost more than you originally allocated for them, cut costs elsewhere, such as going out to eat less often, or staying home for the holidays. You could also consider selling off an asset you no longer need.

Mistake 10: Spoiling Your Grandkids

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Are you grandparents, or Fairy Godparents? You love your grandchildren and want to do things with them that they’ll think is “cool” or entertaining. Sometimes you find yourself buying out the toy store or treating them to outings that don’t really fit into your budget.

Why This Is a Mistake

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Has your retirement budget taken your grandchildren into account? You should factor in memberships – which you can obtain at a significant discount – at their favorite museums and the zoo, instead of popping for admission every time you take them. Take them to the playground. Make sure your library card is handy: you can check out books or movies for free. Better yet, think about making a DIY craft that you can treasure forever.

It is not that difficult to spend high-quality time with your little ones while staying within your all-important retirement budget!

Mistake 11: Not Taking Advantage of Senior Discounts

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Senior discounts can go a long way toward keeping you within your budget, but too many seniors don’t take advantage of them! You could be saving at movie theaters (your grandkids will always love you for taking them to a movie!), museums, theme parks, restaurants, and more, but you have to know your options and set aside your pride to take the discounts. AARP has been trying to get you to join since you turned 50 – now that you’ve retired, it’s time to take the plunge!

Why This Is a Mistake

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You are literally leaving money on the table if you don’t take the senior discounts that you’re now qualified for. And it’s not just fun and food. You can save on prescriptions, cell and internet service, and roadside assistance, to name just a few. If you’re not sure that a discount is offered, it pays well to ask!

Mistake 12: Buying Into Scams

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While it’s important to take advantage of all the deals that are now available to you in retirement, it’s just as important not to be swept away by fast-talking salesman who try to pressure you into buying insurance policies or investments you don’t need.

Why This Is a Mistake

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The best way to avoid being talked into signing up for something you don’t want or need is to have a solid understanding of what you already have in place. Go over your insurance and investment policies with your spouse, a family member, or a financial advisor. Be on the lookout for scams.

Remember that your bank will NEVER ask you for your account number or Social Security number over the phone. No reputable business will ask you for those numbers, either. Seniors are targeted by scammers who know how to tap into anxieties about their health issues or making ends meet on a fixed income.

Mistake 13: Holding on to Your Second Vehicle

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Many people in retirement make the mistake of holding on to their second vehicle. Maybe both spouses needed cars when they were working, or maybe they just can’t imagine having to check with the other spouse before making plans that involve the car. Maybe both cars have sentimental value to the retired couple. But maybe it’s time to let go.

Why This Is a Mistake

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If you’re not using that second vehicle as much as you used to, you’re wasting money on its insurance and maintenance. It depreciates in value every day. Having a second vehicle that you don’t use regularly is like having a big bag of cash sitting in the driveway unopened.

Consider selling that second vehicle today; it will be worth less money tomorrow! Maybe you’ll discover you enjoy the convenience of public transportation or, even better, walking. Your wallet will thank you, and the ozone layer will thank you. Save money, reduce your carbon footprint, and get more exercise!

Mistake 14: Failing to Have a Retirement Income Strategy

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With the likelihood of several different revenue streams in retirement, it’s a mistake not to think ahead about the best ways to utilize each of those income sources.

Why This Is a Mistake

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One of the most difficult aspects of managing your funds in retirement is figuring out which retirement accounts to tap and in which order to tap them. You also need to manage your pension and Social Security benefits.

What are the tax ramifications of tapping each retirement account? How will your income affect Medicare and other benefits? Protect yourself by making plans now. The ramifications of not having a retirement income strategy can be catastrophic.

Mistake 15: Not Doing the Math After a Major Life Event

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Now that you’ve retired, it’s time to kick back and enjoy life as it comes, right? No retiree wants to think about doing the math on their finances – again. But big things happen to retirees just the same as the rest of the population. You or your spouse may have a major medical event. You may – terrible as it sounds, but it does happen – decide to divorce. And, the inevitable, one of the spouses will eventually die.

Why This Is a Mistake

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If you don’t periodically sit down and do the math on your finances, especially after a major life event, you may run out of money sooner than expected and end up as a greeter at Walmart! In the case of divorce, you suddenly have to fund two households instead of one. How are you going to maintain your lifestyle? How are you going to split the retirement accounts?

When your spouse dies, you will need to create a new budget to account for any lost income. If you receive a life insurance benefit, work with a financial advisor to put that money to good use. Major life events don’t have to be the end of the world – they just have to be considered carefully.

Michael Bellom

Michael Bellom

Mike has worked in the financial industry for over 10 years. With experience in residential lending, commodity trading, and personal investment -- his goal is to educate consumers on how best to save and earn money!