Common Retiree Mistakes By Nate Eads

As clients start nearing retirement they often ask us if there are certain things they need to address that they may not have considered. While everyone’s situation is unique, I’ve come up with a few “retiree mistakes” that seem to be more prevalent than most.

Not accounting for health care costs

For people looking to retire before they are eligible for Medicare (usually age 65), out-of-pocket costs for health care must be taken into account. In the best circumstances, retiree health care is available through a previous employer. However even if this is the case, often the retiree is responsible for the full premium compared to when they were working and the company covered all or a portion. For those who are not as fortunate to have retiree health coverage, obtaining private insurance may be their only option. Out-of-pocket costs for this type of coverage can easily run $20,000 per year for a married couple.

The myth of downsizing

Often there is a plan of selling the current home and moving to a smaller one in retirement. Fewer bedrooms, a smaller yard with less maintenance, and a master suite on the first floor all seem very appealing. This is often referred to as “downsizing” when brought up as part of the transition into retirement. In reality however, seldom do we see clients sell their current home and spend significantly less money on a new home, thus pocketing the savings. While the actual square footage may be less, the price tag is usually similar. Community amenities, a newer home, a more convenient location, or new furnishings can make it difficult to significantly downsize in price.

Too much attention paid to “right now” and not keeping a long-term focus

I personally believe this is the most common, and perhaps the biggest mistake retirees make. Once retired it is quite common to lose a long-term focus. Perhaps this is due to having more free time to pay closer attention to things or the adjustment of no longer receiving a paycheck. Whatever the reason, doing so can be detrimental to successfully navigating a 25+ year retirement.

Concerns over what should be considered normal market volatility are amplified, pushing retired investors to want to move out of stocks so they don’t feel any short-term discomfort. This is often in contrast to the investment plan that has been established to provide income not only for the immediate future, but also for decades to come. Becoming ultra conservative now may eliminate the short-term discomfort of portfolio swings, but it also eliminates the opportunity for growth that is typically needed to continue to fund the lifestyle desired.

We also see people elect social security earlier than they should. Many times this is done so there is an income stream coming in each month reducing immediate withdrawals from the portfolio and providing a sense of safety due to the guaranteed income stream. However, when to elect social security should be looked at in context to the whole financial plan as delaying benefits may be better in the long run.

Tax considerations should not only be for the short-term but for the long-term as well. Minimizing taxes over the first few years may create heavier tax burdens down the road. If tax planning is limited to reducing taxes just in the current year, opportunities such as converting traditional IRAs to Roth IRAs, which create tax-free withdrawals moving forward, may be missed.

Relying too much on rules of thumb

There are countless books, articles, blogs etc. on retiring. Many provide easy ways to estimate how much money you will need to live on, what your tax rate will be, or how your investments should be positioned. Two common examples are the old standard of 70% of your working income will be sufficient to live on once retired, and 100 minus your age is the percentage of your portfolio you should have in stocks, with the rest in bonds and cash. I’ve seldom found these simple answers to be appropriate.

With more free time once you stop working, expenses often go up or at least remain level as people have more time to travel, spend time (and money) with children or grandchildren, or become more socially active. As is the case during our working years, time spent not working often equates to money going out, rather than coming in.

In regards to investments, how your money is split between stocks, bonds, and cash should be dictated by what type of return is needed to fund your lifestyle as opposed to simply your age. Other factors come into play such as additional income sources, risk tolerance, or time specific goals. A 60 year old who is looking to withdrawal about 5% per year from their portfolio until they file for social security at age 70 may have a much different investment mix than a 60 year old who is only going to withdrawal 3.5% and will be filing for social security at age 62.

Retirement is a time that you should enjoy to its fullest. By having a plan in place and addressing common considerations before you get there, you may avoid making the mistakes that can lead to financial stress during those years.