By Dennis Notchick, CFP®
For some, there is a saying that goes, “Ignorance is bliss.” This means that the less someone knows about something, the better for them, as they are not aware of the risks and the negative consequences that could affect them. While this may work in some areas of life, this certainly does not work for retirement planning.
I’ve met with thousands of people over the years to talk about their retirement planning. Some have had their financial house in order and ready for retirement, while others may have needed minor adjustments and guidance to allow them to get through retirement efficiently. But the sheer number of mistakes and horror stories that I heard made me cringe. Most could have been avoided if planned for properly. In general, these tend to be the most prevalent retirement mistakes.
Not having a plan.
As with most things in life, if you plan ahead, you tend to avoid mistakes and have a more enjoyable experience. When it comes to retirement, there are no do-overs. Mistakes can be costly. Clearly identifying your retirement goals and creating a plan around them will allow you to see what you are doing well, what areas for improvement, and what has not been addressed. A full-blown, holistic financial plan will uncover your strengths and weaknesses and give you a roadmap to retirement.
We all realize markets are volatile, but you have to invest for the long term. The longer you allow your money to compound the better. Unfortunately, some people are simply too scared to invest. They worry so much about the loss of principal or loss of liquidity that they choose to do nothing. The ramifications of not investing are startling, simply because the cost of living is going up every day. Every single day, the dollar in your wallet is being devalued by the money printing that is happening at the federal reserve. Per a very interesting report, the purchasing power of $100 in 1913 was $100. The purchasing power of that same $100 in 2013 was only worth $4.25. The loss of purchasing power is the hidden cost of living. If your investments are not keeping up with the cost of living, are you? It is no fun to run out of money in retirement.
Not Planning for Income.
When people retire, they look at the level of assets they have and think about a certain “number.” There are even commercials asking people what their magical retirement number is. The problem with that is not the number itself, but how will they get income from the number? Where is the income coming from? If all assets are invested in stocks, and stocks go down 20%, are you willing to sell your stocks down 20% to give you the income to live? This is where retirees may get in trouble, and 2008 was a perfect example. If you retired in 2007 and had all your money in stocks, you had a rude awakening in 2008 as the S&P 500 was down 37%. Some then were forced to sell when markets were down, further depleting the assets. The double whammy was that the money people took out at a loss was gone and they would never participate in the recovery of the market. If all of your money is in the market, where will your income come from? What about your emergency fund? Sequence of return risk means you are subject to volatility, and you may have to sell at a loss to provide for retirement income. This also means you have the risk of depleting your assets faster and running out of money in retirement should there be a series of poor returns and higher/unexpected expenses, poor returns, rising cost of living, etc.
Not Planning Ahead for Taxes.
Another threat to your money is taxes on your investments and savings. Some people automatically think they will be in a lower tax bracket in retirement than while working. Many are often shocked to learn that after collecting Social Security, dividend income and required minimum distributions will push them up to a higher bracket than while they were working. Taxes are not set in stone and can go up in the future. Using tax planning strategies along with tax software to project the impact of asset growth and taxation in the future will show if your tax bill will be out of hand. Whether you look at Roth conversions, tax-free investments in your taxable account, etc. working with a certified financial planner who specializes in tax planning could save you thousands of dollars in taxes over your lifetime.
Not Planning for Healthcare Expenses.
We all know medical expenses are extremely high in the United States. Recently, a report from the Employee Benefit Research Institute (EBRI) found a senior couple could need as much $325,000 to have a 90% chance of covering their out-of-pocket costs, including Medicare premiums and prescription drugs, throughout retirement. Unfortunately for all of us, medical inflation has been far higher than other areas of the economy. Whether it is prescription drugs, costly procedures, or even long-term care, medical costs tend to be the biggest expenses in retirement. Planning for them ahead of time will give you an advantage.
Not Having your Financial House in Order.
Lost or forgotten accounts, having no will or trust, the wrong beneficiary designation, no medical directive, etc. These are all examples of not having your financial house in order. I once met with someone whose husband passed away. The widow had no idea where all of the accounts were, how beneficiaries were titled, or the amount of money they were spending, among other things. It was a lot of work to help her get her financial life back together – all while in the midst of dealing with the grief of losing her husband. As you can see, there are several important areas to retirement planning. Only addressing one or two areas may leave out some things that could come back to haunt you or your spouse in the future. Take time now to address these issues and avoid making these costly mistakes in retirement.
Dennis Notchick, a certified financial planner for Stratos Wealth Advisors (www.dn.stratoswealthadvisors.com), has been serving high net-worth families and business owners since 2008. A certified financial planner since 2010, Notchick has worked with many well-respected firms on Wall Street and provides consulting on retirement planning, investment management, and holistic financial planning. He’s been published or mentioned in numerous online financial publications, including The Wall Street Journal, CNBC, Marketwatch, Forbes, and TheStreet.Investment advice offered through Stratos Wealth Advisors, LLC, a Registered Investment Advisor. Financial services offered through Stratos Wealth Advisors LLC (“Stratos”), a Registered Investment Advisory Firm. The presentation of these topics is for general information only and are not intended to provide specific advice or recommendations for any individual. The information also does not intend to make an offer or solicitation for the sale or purchase of any product or security. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed her