Despite the chatter you’ve probably overheard through the years — at work, family gatherings or neighborhood barbecues — few people actually know as much about retirement planning as they think they do.
Sure, your buddy might know a thing or two about stocks and bonds, or the pros and cons of annuities. And your sister-in-law may have done some thorough research about getting the most from Medicare.
I don’t want to downplay their diligence. But the advice they’re likely offering you just isn’t enough. For one thing, what worked for them might not be the right thing for you. And — just as significantly — they’re undoubtedly skipping over some really important stuff.
How can I be so sure? Because in my nearly three decades as a financial planner, I’ve seen people make the same costly blunders again and again when it comes to retirement planning. They didn’t know what they didn’t know, so they never saw the big risks coming.
The thing is, you can avoid these common mistakes — or, at least, be prepared for them. Here are the four I see most often:
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Blunder No. 1: Not Giving Social Security Enough Respect
Social Security serves as one of the most important income sources for many retirees. According to the Social Security Administration (SSA), among elderly Social Security beneficiaries, 50% of married couples and 70% of unmarried persons receive 50% or more of their income from Social Security.
And yet, retirees often don’t put much effort into deciding when they’ll file for those much-needed benefits.
In a 2019 report by the Michigan Retirement and Disability Research Center at the University of Michigan, 22% of the retirees sampled said they regretted claiming their Social Security benefits when they did (with 20% saying they should have claimed them later).
How and when you begin taking your benefits is a critical decision — even for higher earners. Do your research. If you’re married, look at how your choices might affect your surviving spouse someday. And if you still feel unsure about what to do, get some guidance.
The friendly folks at your local SSA office aren’t authorized to make claiming recommendations. And not all financial professionals are experts on this topic. But I think you’ll find it’s worth your time to find an adviser who is.
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Blunder No. 2: Ignoring Sequence of Returns Risk
If you plan to use money invested in the market as a source of retirement income, this is the monster in the closet. Most people I talk to have never heard of sequence of returns risk, even if they’re working with an investment adviser or broker.
Here’s what it is and why it matters: Upon retirement you no longer add money to your retirement account. Instead, you begin taking withdrawals. If your money is in the market, these market returns become critical to maintaining a reliable retirement income stream. If stocks are at a low because of a big correction or crash, you are pulling money from shrinking accounts, which could significantly reduce the longevity of your plan.
When that correction or crash comes early in retirement, or just before you get there, it can seriously derail your plans. For one thing, that’s typically when you have the largest balances in your accounts, therefore the greatest exposure to a major loss. And even when the market recovers, you might not recover with it.
Fortunately, there are ways to minimize the damage sequence of returns risk can cause. You might find, for example, that it makes sense to reduce your exposure to volatility with a more conservative portfolio mix. A well-thought-out, prudent retirement income plan should provide flexibility when the markets are acting up.
Whatever you do, don’t take this threat lightly.
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Blunder No. 3: Not Having a Plan for Future Long-Term Health Care Costs
According to the U.S. Department of Health and Human Services, a person who turns 65 today has about a 70% chance of needing some type of long-term care services and support later on. Most married couples think they will provide this care for each other, but that isn’t always possible — and it can devastate the health of a caregiver who isn’t physically or emotionally equipped to deal with a loved one’s needs.
Unfortunately, employing outside help is getting more and more expensive. And so is traditional long-term-care insurance, which can help cover many of those costs. (These types of policies also are getting harder to find.)
The good news is that there are several new solutions for those on a fixed budget, including fixed-indexed annuities and retirement life insurance plans that offer long-term-care and/or accelerated death benefits. I know: Annuities tend to get a bad rap. And many retirees think they don’t need life insurance once they reach a certain age. But there are benefits to be had if you can work with someone you trust to choose the right products for your needs.
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Blunder No. 4: Leaving IRA Money to Heirs
Individual Retirement Accounts (IRAs) are, by their very nature, meant to be depleted over the account owner’s lifetime. Indeed, the IRS encourages it. Even if you don’t want or need to withdraw the money during your retirement, you must take required minimum distributions (RMDs) every year starting at age 72.
But what if you don’t empty the account and, instead, leave the money behind for your children?
Due to recent changes in the tax laws, your kids will have just 10 years to empty the account — and they’ll pay taxes based on their tax bracket at the time they make those withdrawals, not your tax bracket. If they happen to be in their highest-earning years (which is often the case), a large chunk of the money your children would have enjoyed could end up going to the IRS.
If you’ve socked away the bulk of your savings in a tax-deferred account (a 401(k), 403(b), traditional IRA, etc.) you aren’t stuck. During your lifetime, there are ways you can change taxable dollars into nontaxable dollars, such as a Roth IRA conversion.
Yes, the amount you transfer will be taxed to you as ordinary income, but done correctly, you may be able to minimize the amount you pay now and make things easier for your kids in the future. Once in the non-taxed account, this money can pass tax-free to your heirs. And it will be available tax-free to you, too, if you need it for your own purposes. Some advanced strategies, for example Charitable Remainder Trusts, may allow you to greatly reduce or avoid income taxes altogether. A qualified financial planner, along with an estate planning attorney and CPA, can help you determine which strategies makes sense for your family.
Pursuing your retirement dreams is challenging enough without making these common blunders. As you listen to others’ tips and tales, keep in mind that real knowledge is power. Don’t hesitate to ask for professional guidance when designing your retirement income and retirement tax plans.
Kim Franke-Folstad contributed to this article.
Investment advisory services offered through Virtue Capital Management LLC (VCM), a registered investment advisor. VCM and Xexis Private Wealth LLC are independent of each other.
For a complete description of investment risks, fees and services, review the Virtue Capital Management firm brochure (ADV Part 2A), which is available from your Investment Adviser Representative or by contacting Virtue Capital Management. Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.
Dan Brooks and/or Xexis Private Wealth LLC are not affiliated with or endorsed by the Social Security Administration or any other government agency.
Insurance and annuity products are not sold through Virtue Capital Management LLC (“VCM”). VCM does not endorse any annuity or insurance product nor does it guarantee any annuity or insurance product’s performance.
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