#1 Retiring Too Early
Retiring too early will significantly reduce your Social Security benefits.
Early retirement can have a major impact on your social security retirement income – particularly if you have retired and continue to work part-time.
For those born between 1943-1954, the age you can retire with full social security benefits is 66, which gradually rises to the age of 67 for those born in 1960 or later. Though you can apply for early retirement at the age of 62, your benefits will be reduced by between 25-30%.
Additionally, if you are under the full retirement age and working at all, the income you receive from working will be subject to the earnings test. Depending on your total income it may very well have an impact on the benefits you receive.
Alternately, you can decide to delay taking benefits until age 70, which makes you eligible to receive delayed retirement credits of an additional 8% per year.
So, before you decide to retire, make sure you get some sound financial advice that takes your unique circumstances into account, and to find out what impact, if any, your decisions will have on your social security income.
#2 Longevity Risk
You could potentially outlive your resources.
We all want to live long, happy, productive lives. But what if we live longer than we have planned for? It’s a delicate balance. You want to live comfortably and spend your money on the things you enjoy, but what happens if the money runs out?
The number of years you have left to enjoy life is an unknown. Of all the risks you take on when planning for a secure retirement, your longevity might be the greatest of all.
Simply put, longevity risk is an amplifier for a number of other risks. This includes inflation risk, and the need to have your spendable income keep up with the cost of living.
In addition, there is an increased chance of experiencing a serious and/or prolonged health issue or illness which can be very expensive. Longevity risk highlights the need for disciplined investment management to help get you through what could be multiple investment cycles, which include both bull markets and bear markets.
With income tax rates about as low as they have ever been, and considering our country is about $20 trillion in debt I believe the chances for increased taxes over the next several years is high. Of course, there is also a chance for a reduction in Social Security benefits, an increase in Medicare costs, death of a spouse, the list goes on.
You see, nobody has a crystal ball to accurately predict what will happen in the future–but if you know the risks involved, you can plan accordingly, making contingency plans for any scenario.
#3 Sequence of returns risk
Sequence of returns risk is possibly the greatest threat of all to your retirement income that most people are not even aware of.
Today, and into future, it’s very likely that people will spend 20 years, 30 years, and perhaps even longer in retirement. That’s a really long time!
The potential problem is that if your investments experience a significant loss while you are taking withdrawals for income from these accounts, this will increase the chances that you will run out of money at some point in retirement.
If you intend to take withdrawals from your investments in order to supplement your retirement income, it is absolutely critical to protect yourself from large stock market losses – especially in the period of 5 years before you plan to retire and 5-7 years afterward. Minimizing or eliminating this risk is not only advisable, it is quite possible. My blog post on Sequence of Returns Risk covers this subject in greater depth.
#4 Not having a disciplined investment management process
It is critical to understand why you are investing and what you want your investments to do for you. Get specific.
In devising your investment strategy, it is really important to take a disciplined approach to risk management. I believe it is best to begin with the end in mind and work backwards.
For instance, what rate of return do you need to achieve on your investments in order to maintain the lifestyle you imagine all throughout your retirement years?
The next step is developing and implementing a disciplined investment process with careful risk management. Too often, I see people that are investing like they are trying to make 10% a year when all they need is 2% in order to achieve their goals. Other times, I see the opposite. Ultimately, your investments need to be in line with your overall goals and objectives.
In addition to considering your overall income needs, you need to determine your risk tolerance, your tax situation, the amount of income you need from your investment accounts and when you need it. This will serve as a starting point to help devise an investment plan that is right for you. Above all, it’s imperative that this strategy is structured to meet your financial goals.
#5 Medical expenses
Rising of medical and long-term care costs can be a major burden.
Medical costs are on the rise. No matter what your health situation is, you can’t possibly predict what may come to pass tomorrow, next year or ten years down the road.
Medicare is limited. Medicare supplements are private insurance policies that cover standard costs not covered by Medicare, but these can have out-of-pocket deductibles, co-pays and high premiums, and they don’t pay for long-term care.
The average cost of long-term care is between $40K – $100K per year, and Medicare has a lot of restrictions on how they pay and what they will pay for: for instance, you are only eligible if you have had a recent hospital stay of three days or more, and you are admitted to the nursing facility within 30 days of discharge from the hospital. They will pay for 100% of your costs for the first 20 days, and from day 21 to day 100 they only pay a portion – you are responsible for the balance, no matter what your needs might be.
So, assuming the average person that ends up needing long-term care will need it for two years or more, that alone can destroy even the best-laid retirement plans. Above all, you want to be able to afford the care you need when you need it without impacting your quality of life or that of your loved ones.
Careful planning for any medical eventuality, including disability, critical illness and long-term care can protect your assets and support you and your family through whatever may come. Having the right plan in place will give you the peace of mind you deserve. If you have any questions about planning for medical expenses and long-term care contact me today. You can also find out more in my recent blog post: Why Long Term Care Insurance? In it, I address all your questions about long-term care insurance and how to decide if it is right for you.
#6 Not a having a solid distribution strategy
Drawing income from the wrong investments
People spend years just focused on accumulating assets, saving and investing for some time in the future. However, oftentimes no real thought is given as to how to effectively create a solid distribution strategy or retirement income strategy.
Knowing when and how to take income from various retirement accounts and other sources of income effectively is critical in helping to make sure that you outlive your income in retirement – as opposed to you outliving your income and running out of money.
Distributing your retirement income effectively involves deciding which retirement accounts and other sources of income to draw from in order to help minimize the income taxes you have to pay so you can have more spendable income.
For instance, just because you can wait until you are 70.5 years of age to begin taking withdrawals from your IRA, does that mean you should? Should you convert to a Roth? Or perhaps should you consider a partial conversion? Some other questions you might have include: When should I take Social Security? Can I reduce or possibly even eliminate the taxes on my Social Security? And if so, how can I possibly create a more effective distribution strategy that may allow that to happen? These are just a few things that need to be considered when creating a retirement income strategy.
You need to understand the distribution rules around each of your investment accounts before you make any sweeping decisions: this is absolutely critical.
#7 Not being tax efficient
The less you legally have to pay in taxes means more spendable income for you.
Above all, you want your money to go to those who you care most about – and that’s probably not the government. Many assume that in retirement, their taxes will become lower, but for a lot of people that is just not the case, and especially not for those that have done a good job saving and investing for their future.
However, with some strategic planning, it is possible to reduce your tax burden and protect your assets from unnecessary tax expenditures. Always remember: every dollar you save in taxes is money you can spend on things you would rather be doing – play more golf, take some vacations or spoil the grand-kids with a Disney cruise.
Planning can be done to minimize or eliminate the tax you pay on your social security income, and also to be more efficient in managing your taxable investment income.
#8 Not factoring in inflation
What you think is enough today may not be nearly enough tomorrow.
We all know that what things cost now are nowhere near what they used to cost. And in the future, who knows. We might not be as lucky as we have been the past few years with a relatively low rate of inflation. The rising costs of health care, housing, food, gas – just about everything, in fact – must be considered when planning for retirement.
If you make your calculations based on your current expenses, you might be in for the shock of your life when it all dwindles to nothing. The goal is to manage the distribution of your investments with inflation in mind, to minimize your tax burden and put a plan in motion to ensure that your money outlives you.
With a few simple calculations we can make adjustments to your retirement plan that can help provide more than you will need to live well, for as long as you live.
#9 Getting investment advice from a non-professional
Chasing the latest stock tip your neighbor gave you, or something you heard on TV.
Your friend might be a smart cookie, but if he isn’t a professional financial advisor you might be chasing smoke. These well-meaning individuals, even the ones on TV, are likely just rehashing opinions they have heard elsewhere, and they certainly aren’t taking your unique situation into account. This is key: something that works for your friend might not work for you. He/she has no idea about your financial situation, your portfolio, your health, etc., and they are probably making generalized statements that are meant for a broad audience. How well do they really know you?
At Milestone Wealth, the time we spend getting to know you becomes the blueprint for your financial planning. You have priorities and goals that are unique to you, so why shouldn’t you have a strategy that is custom designed for you as well? Don’t make the mistake of listening to your friends, relatives or the guy on television.
Your physical, emotional and mental health are the cornerstones of happiness, but all of these things are impacted if your income or savings disappear. Strategic planning can help you maximize your assets and minimize your tax burden, ensuring that your golden years are truly healthy, wealthy and wise.
Image copywrite: iqoncept/123RF Stock Photo