Even Responsible Savers Make Retirement Mistakes

There actually are people out there diligently saving for retirement.

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Yes, you read that correctly. It may not seem like it, given the media’s constant focus on Baby Boomers’ shaky financial future. But there are pre-retirees who have been putting away money for decades in preparation for a long and happy retirement.

If you’re in that group, good for you.

But even people who have been responsible with their money can run into challenges when they enter retirement. It requires a monumental shift in your mindset, and it’s easy to make mistakes.

Here are four missteps that even skillful savers need to learn to avoid:

1. Don’t become too enamored with cash.

I often find that people who are naturally gifted at saving money have far too much sitting in cash. And I understand that. Many fear investing in the market because of previous tumbles. In the last 16 years, we’ve had two major drops, and that puts people on edge.

It’s important to always have some emergency money available, but holding too much cash in your portfolio or in the bank opens you up to inflation risk. As the years pass, you’ll lose purchasing power. And then there’s the issue of taxes. If you keep your money in a taxable savings, money market, brokerage or other cash account, you’ll have an ever-growing tax liability. If safety is a priority, talk to your adviser about alternatives that protect your principal and offer a reasonable rate of return.

2. Don’t take too much risk.

If you’ve been enjoying this long-running bull market, like so many have, it’s likely your risk meter is broken. And again, that makes sense. If you lost money in your 401(k) or IRA back in 2000 or 2008, I’m sure you didn’t like it much, but if you were still working and earning a paycheck, it probably didn’t affect your day-to-day lifestyle. Your expenses were met and you were still contributing to your retirement accounts. But in retirement, you won’t have that paycheck anymore. And because your nest egg must generate income, market volatility can have a much greater impact.

Completely avoiding the markets is not a solution for most retirees — especially if you’re going to keep pace with inflation and retain the opportunity for growth and future income. But saving for retirement and planning for retirement are two different things. It’s important to take a balanced approach between income and growth to help prepare for good and bad economic times.

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3. Don’t forget about the tax “time bomb.”

Tax planning should be a part of your decision-making as soon as you begin retirement planning. Believe it or not, taxes don’t end when you retire. Many people think they do — or, at least, they think taxes will be greatly reduced. That’s a myth — especially now, as so many retirees have most of their savings in tax-deferred accounts.

When you withdraw money from those accounts in retirement, you’ll be taxed on your contributions and the account growth. It may not seem like it, but today’s taxes are low compared to what past generations experienced. Do you think you’ll be alive when taxes are higher than they are now? Remember, the federal debt now stands at $20 trillion, and projections suggest that amount will continue to rise. Somebody is going to have to pay that bill.

Unfortunately, tax-deferred accounts are vulnerable to tax hikes. It’s probably a good idea to take advantage of those low rates while you can by working with a certified tax planner to help find ways to get your tax rate closer to zero. Some possibilities to explore include converting part of your traditional IRA each year to a Roth IRA. You’ll owe taxes on the amount converted, but it may be at a lower rate since you’re retired, and the Roth has no required minimum distributions.

4. Don’t neglect to live a little.

Some retirees have trouble remembering what they worked so hard to save for. They had an idea of the life they wanted in retirement, but they worry so much about running out of money, they let that dream go. A comprehensive retirement plan can help you transition from a saving mindset and help give you the confidence to spend on the things you always hoped and dreamed for, and for which you worked so hard to save.

Whether your retirement assets are modest or massive, there are common challenges for all retirees. From day one, you’ll need reliable income streams so you can pay your basic bills. That money will form the foundation for the rest of your retirement — and once that foundation is in place, you can build your lifestyle around it. Lifestyle income is the money you spend for fun, family, travel, adventure, etc. It’s going to fluctuate as the markets traverse their inevitable ups and downs, but it should be part of your plan.

Retirement shouldn’t be a time of worry and stress. It should be a time to relax and enjoy life after years of working. But just saving up a big stash of money isn’t enough to guarantee success. A plan that addresses current and future needs will help keep you on track and help you reach your retirement goals.

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Kim Franke-Folstad contributed to this article.

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and Carolina Retirement Resources are independent of each other.

Investing involves risk, including the potential loss of principal. Any references to protection benefits or safety generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Dr. Richard Pucciarelli is the president and founder of Carolina Retirement Resources Inc. He has over 15 years experience serving retirees and pre-retirees in planning for and protecting their financial futures. Pucciarelli is an Investment Adviser Representative and a licensed insurance professional. He hosts the "Financial Symphony" show on WBT Radio 1110 AM every Saturday morning at 11 a.m.

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