By Bob Niedt, Online Editor | June 19, 2018
As more and more baby
boomers start eyeing retirement, thoughts turn from worry over the workday
commute to concerns about how to fund the golden years.
How prepared are you?
How much money do you really need to retire? Do you know the ins and outs of
your pension (if you're lucky enough to have one)? How about your 401(k), IRA
and other retirement accounts that make up your nest egg? Do you have a good
handle on when to claim Social Security benefits? These are some of the
questions to contemplate as retirement approaches. But long before you punch
out, make sure you are making the right choices.
We've compiled a list
of the biggest retirement planning mistakes and how to avoid making them.
Take a look to see if any sound familiar.
Relocating on a Whim
The lure of warmer
climates has long been the siren call of many who are approaching retirement.
So you're cooking up a plan to head south to Florida or one of the many other great places to retire if you hate the cold. Our advice: Test
the waters before you make a permanent move.
Too many folks have
trudged off willy-nilly to what they thought was a dream destination only to
find that it's more akin to a nightmare. The pace of life is too slow, everyone
is a stranger, and endless rounds of golf and walks on the beach grow tiresome.
Well before your retirement date, spend extended vacation time in your anointed
destination to get a feel for the people and lifestyle. This is especially true
if you're thinking about retiring overseas, where new languages, laws and customs
can overwhelm even the hardiest retirees.
Once you do make the
plunge, consider renting before buying. A couple I know circled Savannah, Ga.,
for their retirement nest. But wisely, as it turned out, they decided to lease
an apartment downtown for a year before building or buying a new home in the
suburbs. Turns out the Deep South didn't suit their Northern Virginia
get-it-done-now temperament. They are instead thinking of joining the ranks of
"halfback retirees" – people who head south, find they don't like it,
and move halfway back toward their former home up north.
Falling for Too-Good-To-Be-True Offers
Hard work, careful
planning and decades' worth of wealth-building are the foundations of financial
security in retirement. There are no short cuts. Yet, Americans lose hundreds
of millions of dollars a year to get-rich-quick and other scams, according to
the FTC. Of the more than 3 million complaints received in 2016, 37% were filed
by people ages 60 and over. Fraud victims reported paying $744 million to
scammers. My parents, both in their mid-80s and of sound mind, constantly
receive calls on their land line from scammers trying to make them part with
their hard-earned retirement dollars.
States' Attorney
General offices and the FTC offer tips for spotting too-good-to-be-true offers.
Tell-tale signs include guarantees of spectacular profits in a short time
frame without risk; requests to wire money or pay a fee before you can
receive a prize; or unnecessary demands to provide bank account and credit card
numbers, Social Security numbers or other sensitive financial information. Also
be wary of — in fact, run away from — anyone pressuring you to make an
immediate decision or discouraging you from getting advice from an impartial
third party.
What do you do if you
suspect a scam? The FTC advises running the company or product name, along with
"review," "complaint" or "scam," through Google
or another search engine. You can also check with your local consumer protection
office or your state attorney general to see if it has fielded any complaints.
If it has, add yours to the list. Be sure to file a complaint with the FTC,
too.
Planning to Work Indefinitely
Many baby boomers
like me have every intention of staying on the job beyond age 65, either
because we want to, we have to, or we desire to maximize our Social Security checks. But that plan could
backfire.
Consider this: 53% of
workers expect to work beyond age 65 to make ends meet, according to the
Transamerica Center for Retirement Studies. Yet, you can't count on being able
to bring in a paycheck if you need it. While more than half of today's workers plan
to continue working in retirement, just 1 in 5 Americans age 65 and over are
actually employed, according to U.S. Department of Labor statistics.
You could be forced
to stop working and retire early for any number of reasons, according to the
Transamerica Center for Retirement Studies. Health-related issues — either your
own or those of a loved one — are a major factor. So, too, are employer-related
issues such as downsizing, layoffs and buyouts. Failing to keep skills up to
date is another reason older workers can struggle to get hired. The actionable
advice: Assume the worst, and save early and often. Only 28% of baby boomers
surveyed by Transamerica have a backup plan to replace retirement income if
unable to continue working.
Putting Off Saving for Retirement
The single biggest
financial regret of Americans surveyed by Bankrate was waiting too long to start saving
for retirement. Not surprisingly, respondents 50 and older expressed this
regret at a much higher rate than younger respondents.
"Many people do
not start to aggressively save for retirement until they reach their 40s or
50s," says Ajay Kaisth, a certified financial planner with KAI Advisors in
Princeton Junction, N.J. "The good news for these investors is that they
may still have enough time to change their savings behavior and achieve their
goals, but they will need to take action quickly and be extremely disciplined
about their savings."
Here's how much you
need to sock away monthly to build a $1 million nest egg by age 65, based on
Morningstar calculations. Assuming a 7% annual rate of return, you'd need to
save $381 a month if you start at age 25; $820 monthly, starting at 35; $1,920,
starting at 45; and $5,778, starting at 55.
Uncle Sam offers
incentives to procrastinators. Once you turn 50, you can start making
catch-up contributions to your retirement accounts. In 2018, that means older savers can contribute an extra $6,000 to a 401(k) on
top of the standard $18,500. The catch-up amount for IRAs is $1,000 on top of the standard
$5,500.
Claiming Social Security Too Early
You're entitled to
start taking retirement benefits at 62, but you might want to wait if you can
afford it. Most financial planners recommend holding off at least until your
full retirement age — 67 for anyone born after 1959 — before tapping Social
Security. Waiting until 70 can be even better.
Let's say your full
retirement age, the point at which you would receive 100% of your benefit
amount, is 67. If you claim Social Security at 62, your monthly check will
be reduced by 30% for the rest of your life. But if you hold off, you'll
get an 8% boost in benefits each year between ages 67 and 70 thanks to delayed
retirement credits. There are no additional retirement credits after you turn
70. Claiming strategies can differ for couples, widows and divorced spouses, so
weigh your options and consult a professional if you need help.
"If you can live
off your portfolio for a few years to delay claiming, do so," says Natalie
Colley, a financial analyst at Francis Financial in New York City. "Where
else will you get guaranteed returns of 8% from the market?"
Alternatively, stay on the job longer, if feasible, or start a side gig to help
bridge the financial gap. There are plenty of interesting ways to earn extra cash these days.
Borrowing From Your 401(k)
Taking a loan from
your 401(k) retirement-savings account can be tempting. After all, it's your
money. As long as your plan sponsor permits borrowing, you'll usually have five
years to pay it back with interest.
But short of an
emergency, tapping your 401(k) is a bad idea. According to Meghan Murphy,
vice president of thought leadership at Fidelity Investments, you're likely to
reduce or suspend new contributions during the period you're repaying the loan.
That means you're short-changing your retirement account for months or even
years and sacrificing employer matches. You're also missing out on the
investment growth from the missed contributions and the cash that was borrowed.
Keep in mind, too,
that you'll be paying the interest on that 401(k) loan with after-tax dollars —
then paying taxes on those funds again when retirement rolls around. And if you
leave your job, the loan usually must be paid back win as little as 30 days.
Otherwise, it's considered a distribution and taxed as income.
Before borrowing from
a 401(k), explore other loan options. College tuition, for instance, can be
covered with student loans and PLUS loans for parents. Major home repairs can
be financed with a home equity line of credit.
Decluttering to the Extreme
My parents are in
their mid-80s and have been living in the same house for decades. In recent
years they have started getting rid of all the bric-a-brac they've accumulated.
Their goal is either to sell and move into a retirement community or, at the
least, make it easier for my brother and I down the road when we inherit the
home.
There hasn't been
much junk among the items they've parted with save for the wall clock they gave
me and swore it worked (it doesn't). But there were also items my father wisely
ran past his lawyer before dumping: Bookkeeping records from the business he
owned for years. He was cleared.
Still, that's fair
warning: Be careful about what you throw out in haste. Sentimental value
aside, certain professionals including doctors, dentists, lawyers and
accountants can be required by law to retain records for years after
retirement. As for tax records, the IRS generally has three years to initiate
an audit, but you might want to hold on to certain records including your
actual returns indefinitely. Same goes for records related to the purchase and
capital improvement of your home; purchases of stocks and funds in taxable
investment accounts; and contributions to retirement accounts (in particular
nondeductible IRA contributions reported on IRS Form 8606). All can be used to
determine the correct tax basis on assets to avoid paying more in taxes than
you owe.
Putting Your Kids First
Sure, you want your
children to have the best — best education, best wedding, best everything. And
if you can afford it, by all means open your wallet. But footing the bill for
private tuition and lavish nuptials at the expense of your own retirement
savings could come back to haunt all of you.
"You cannot
borrow for your retirement living," says Joe Ready, director of
Wells Fargo Institutional Retirement and Trust. "[But] you may have other
avenues beyond [borrowing from] your 401(k) plan to help fund a child's
education." Instead, Ready says parents and their kids should explore
scholarships, grants, student loans and less expensive in-state schools in lieu
of raiding the retirement nest egg. Another money-saving recommendation:
community college for two years followed by a transfer to a four-year college.
(There are many smart ways to save on weddings, too.)
No one plans to go
broke in retirement, but it can happen for many reasons. One of the biggest
reasons, of course, is not saving enough to begin with. If you're not prudent
now, you might end up being the one moving into your kid's basement later.
Buying into a Time-Share
t's easy to see the
appeal of a time-share during retirement. Now that you're free from the 9-to-5
grind, you can visit a favorite vacation spot more frequently. And if you get
bored, simply swap for slots at other destinations within the time-share
network. Great deal, right? Not always.
Buyers who don't
grasp the full financial implications of a time-share can quickly come to
regret the purchase. In addition to thousands paid upfront, maintenance fees
average upward of $660 a year, and special assessments can be levied for major
renovations. There are also travel costs, which run high to vacation hotspots
such as Hawaii, Mexico or the Bahamas.
And good luck if you
develop buyer's remorse. The real estate market is flush with used
time-shares, which means you probably won't get the price you want for yours
— if you can sell it at all, according to Ron Kelemen, a retired Salem,
Ore.-based financial planner. Even if you do find a potential buyer, beware:
The time-share market is rife with scammers.
Experts advise owners
first to contact their time-share management company about resale options. If
that leads nowhere, list your time-share for sale or rent on established
websites such as redweek.com
and tug2.net.
Alternatively, hire a reputable broker. The Licensed
Timeshare Resale Brokers Association has an online directory of
its members. If all else fails look into donating your time-share to charity for the tax write-off.
Avoiding the Stock Market
Shying away from
stocks because they seem too risky is one of the biggest mistakes investors can
make when saving for retirement. True, the market has plenty of ups and downs,
but since 1926 stocks have returned an average of about 10% a year. Bonds, CDs,
bank accounts and mattresses don't come close.
"Conventional
wisdom may indicate the stock market is 'risky' and therefore should be avoided
if your goal is to keep your money safe," says Elizabeth Muldowney, a
financial adviser with Savant Capital Management in Rockford, Ill.
"However, this comes at the expense of low returns and, in fact, you have
not eliminated your risk by avoiding the stock market, but rather shifted your
risk to the possibility of your money not keeping up with inflation."
We favor low-cost mutual funds and exchange-traded funds because they offer an affordable way
to own a piece of hundreds or even thousands of companies without having to buy
individual stocks. And don't even think about retiring your stock portfolio
once you reach retirement age, says Murphy, of Fidelity Investments. Nest
eggs need to keep growing to finance a retirement that might last 30 years. You
do, however, need to ratchet down risk as you age by gradually reducing your
exposure to stocks.
Ignoring Long-Term Care
We all want to
believe we'll stay healthy and motoring long into our retirement years. A good
diet, plenty of exercise and regular medical check-ups help. But even the
hardiest of retirees can fall ill, and absent a serious illness time will take
its inevitable toll on mind and body as you progress through your 70s, 80s and
90s.
When the day arrives
that you or a loved one does require long-term care, be prepared for sticker
shock. A 2017 Genworth survey found that the national median cost of
assisted living is $45,000 a year; a private room in a nursing home, $97,455 a
year. Even a sizable retirement nest egg can be wiped out in a hurry. And
remember, Medicare doesn't cover most of the costs associated with long-term
care.
There are options for
funding long-term care, but they're pricey. If you can afford the high
premiums, consider long-term care insurance, which covers some but not
necessarily all nursing home costs. A typical policy for a 55-year-old male
might start at $2,000 a year, according to Genworth. The annual premium jumps
to $3,000 if the man waits until 65 to buy a policy. You can also look into
purchasing a qualified longevity annuity contract, known as a QLAC. In exchange for investing a hefty lump
sum up front when you're younger, the QLAC will pay out a steady stream of
income for the rest of your life once you hit a certain age, typically 85.
Neglecting Estate Planning
Estate planning isn't
just for the wealthy. Even if your assets are modest — perhaps just a car, a
home and a bank account — you want to have a valid will to specify who gets
what and who will be in charge of dispersing your money and possessions (a.k.a.
the executor). Die without a will and your estate is subject to your state's
probate laws. Not only could your assets get tied up in court, possibly
creating financial hardship for your heirs, but absent a will a judge might
ultimately award your assets to an unintended party such as an estranged spouse
or a relative you never liked.
Retirement is an
ideal time to review existing estate-planning documents and create the ones
you've long ignored. Start with the aforementioned will. You might have had one
drawn up years ago when your kids were young. Decades later, what's changed?
Are you divorced? Remarried? Richer? Poorer? Maybe you prefer for your
grandkids or a favorite charity to inherit what you originally earmarked for
your now-grown children? Remember, too, that some assets, such as retirement
accounts, fall outside your will. Be sure the beneficiaries you have on file
with financial institutions are up to date.
A will is just the
start. You should also draft a durable power of attorney that names someone to
manage your financial affairs if you need help or become incapacitated. And
your health-care wishes should come into sharper focus now that you're older.
Advance directives such as a living will, which spells out the treatments you
do and don't want if you become seriously ill, and a power of attorney for
health care, which names someone to make medical decisions for you if you can't
make them yourself, are essential.
Borrowing Against Your Home
It's tempting for
retirees who are house rich but cash poor to tap the equity that's built up in
a home. This is especially true if the mortgage is paid off and the property
has appreciated substantially in value. But tempting as it might be, think
hard before taking on more debt and monthly payments at precisely the time when
you've stopped working and your income is fixed.
Rather than borrow
against the value of your home, explore ways to lower your housing costs. Start
with downsizing. Sell your current home, buy a smaller place in the same area,
and put your profits toward living expenses. For the ultimate in downsizing,
consider a tiny home for retirement — seriously. Tiny homes are
inexpensive, upkeep is easy, and utility bills are low. If you're willing to
relocate, sell and move to a cheaper city that's well-suited for retirees.
Or, stay put and find a roommate. The rental income will supplement your Social
Security and savings.
If you must tap your
home equity, tread carefully. If you still have a mortgage, look into a cashout
refi. Just try to keep the length of the refinanced mortgage to a minimum to
avoid making repayments deep into retirement. Otherwise, investigate a home equity
loan or home equity line of credit (HELOC). However, be forewarned that under the new tax law you won't be able to deduct the
interest on these loans unless the money is used to substantially improve your
home, such as replacing the roof. In the past the interest could be deducted
even if you spent the money on, say, a vacation or a new car. Yet another
option for retirees is a reverse mortgage. You'll receive a lump sum of money or
access to a line of credit that in most cases doesn't need to be repaid until
you or your heirs sell the home.
Failing to Plan How You'll Fill Your Free Time
A friend of mine had
a nice government job. One of the perks was early retirement. He went for it.
But not long after, he informed me he was going back to his old position,
albeit two days a week. "There's only so many movies to see alone during
the day in an empty theater," he said. "That got old fast."
Our careers provide
structure to our lives five days a week, and weekends can be consumed by chores
and rest. The cycle starts all over again Monday morning. But once you leave
your job for good, there's suddenly a lot of time to fill. Have you
truly thought through how you will fill it in retirement?
It's critical to plan
your free time in retirement as thoroughly as you plan your finances. How about a
part-time job doing something you love? My happy place the summer between high
school and college was working at a theme park in New Jersey. No one was
unhappy there. I've always kept "theme park job in retirement" in my
back pocket. You could also take a casual hobby to new levels now that you have
the time to devote to it. Or, you could return to school. Many public colleges
and universities (and some private ones) offer free or reduced tuition to
residents of a certain age, often starting at 60. Check a school's website for
details, or call the registrar's office.
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