Common Retirement Mistakes & Misunderstandings
In the 35 years that I’ve worked as a financial planner, I’ve fielded a lot of questions about retirement and heard a lot of angst about the right and wrong ways to plan for and manage the money side of it. Today I want to address three of the most common mistakes and misunderstandings that I see retirees make, often with painful results. It’s one of those situations where you can benefit from other people’s mistakes, so I hope that you can store the general ideas away in your memory and bring them up later in a conversation with a financial advisor.
Be Careful About Taking Social Security Benefits Early
The first mistake has to do with electing to receive Social Security benefits too early. Did you know that if you opt to receive Social Security benefits at age 62 (the first year you can receive them) that your monthly payments will be as much as 30% smaller than they would be if you wait to collect at “full retirement age” (either 66 or 67 depending on your birth year)? Or that if you delay your Social Security benefits until after 3 or 4 years after “full retirement age” that you’ll see your benefits grow 32%? The longer you wait to apply for Social Security benefits, the higher your monthly checks will be. Not only that, but the differences can be pretty dramatic—you’ll receive nearly twice as much per month if you wait until you turn 70 than if you start at 62.
If you’ve already made the decision to receive Social Security benefits early or even at “full retirement age”, you may be able to back out, put your checks on hold, and wait until the benefit amount gets larger. Those who have been receiving benefits for less than a year can withdraw their application for early benefits and reapply later. In this scenario, you’d pay back all the benefits you’ve already received. The process is pretty simple. It gets a little more complicated for those who have reached “full retirement age” and have automatically begun receiving benefits. You can suspend the monthly checks for up to 4 years or until age 70. For each year you do this, there’s an 8% bump in the amount you’ll receive when that suspension comes off. An important side note for both of these scenarios is that spousal and survivor benefits will also be suspended while your benefits are being delayed. I’ve done a number of segments on this issue; just come to the stevepomeranz.com site and put social security in the search bar.
Knowing exactly when to start and how to claim Social Security benefits can be, as one expert put it on Fool.com, “diabolically complicated.” This is especially true when children are in the equation and you need to grapple with family benefits. It’s generally a good idea to seek professional advice when it comes to figuring out how Social Security benefits should fit within your overall retirement plans.
Being Too Conservative With Investments During Retirement
The second mistake people make is investing too conservatively during retirement. This one can be a little tricky because conventional wisdom suggests that as you get older, you should shift the assets around in your retirement savings portfolio from riskier investments like stocks to less risky investments like bonds. Many early retirees try to do too much of this re-balancing too quickly, however, and pull most of their money out of equities and put it into conservative, lower-return assets in the search for wealth preservation. Considering the traumatic losses investors were dealt during the 2008 and dot com market meltdowns, it’s no wonder that retirees are eager to cut back on their stock holdings and coast on money markets, bonds, and fixed annuities. The problem is that they forget that retirement could last 30 years. Simply put, to enjoy financial comfort for two plus decades of retirement, you may need a higher return on your savings during retirement than what pure conservative investments can provide—especially these days!
Low Risk, Low Return Leaves Retirees Vulnerable
Low returns can hurt your standard of living when you think about the effects of inflation. Rising prices will continually eat away at the purchasing power of your savings. So, yes, even though inflation has been low for more than a decade, the interest rates on bonds, CDs, money market funds, and savings accounts have been even lower, so your standard of living is slowly shrinking year after year. This leads to the thought about whether or not your money will last throughout your lifetime. Under this low-return scenario, many will wonder if their money will last their lifetime. It’s a very real possibility and one that shouldn’t be neglected. You don’t want to find yourself relying entirely on Social Security (stick in grey nomads link) to get by in your later years. Even if you only have a modest amount of money to work with, consider investing in stocks or real estate so you may grow what’s left. You should also do your best to be financially prepared for unknown hardships and expenses, particularly health care and the possibility of needing assisted living or long-term in-home care.
Paying Off Your Mortgage Early May Not Be A Great Idea
The last mistake that I see retirees make is immediately paying off their mortgage. Even though there’s a powerful psychological appeal to being “debt-free,” in reality, many people in or near retirement should consider not accelerating the payment of their mortgage. I should note that the reasons I will list here do not apply to everyone, and you should try to get professional advice on your unique situation before making a decision to pay or not to pay off your mortgage. One compelling reason to hold off on “retiring” your mortgage is if you have credit card debt at much higher interest rates. Pay these and any other high-interest loans off first. If you’re still working and haven’t contributed the maximum amount to your IRA or 401(k) accounts, prioritize these over paying more towards your mortgage. On a related note, if your mortgage interest rate is relatively low, it is probably wise to divert funds from paying it off into investments in a diversified asset portfolio. Of course, this does involve taking on new risk, so you ought to compare your mortgage rate to a risk-free investment like a good quality bond; if the mortgage rate is higher, you may actually want to pay more towards the mortgage in this case. Also, if you plan on moving out of your home in a year or two, it’s better not pay off your mortgage. Finally—and this is something I see a lot and it’s very important—if you have a modest amount of savings, don’t use the bulk of it to pay off your mortgage. You might need it for emergencies, and you might need to get it to grow to accumulate more wealth. Remember, you don’t want to be “House Poor”. There are quite a few tax and other issues that I can’t cover here today, but a certified financial planner and tax accountant should be able to walk you through them.
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