How to Avoid These 5 Common Retirement Mistakes
As you start thinking about retiring, you are likely soaking up as much knowledge as you possibly can in preparation. Regardless of how much preparation has gone into your retirement planning, this next chapter is a big transition. During this time, it is very understandable to feel scared or concerned you may be missing something. To alleviate these concerns and manage potential pitfalls, the key is to avoid 5 of the most common retirement mistakes that we see.
Retirement Mistake #1: Not identifying your expenses
When you reach retirement, it is important to know your expenses as a baseline. Even better is to break your expenses into two categories: needs and wants. If you are able to be specific with your expense categories, you can make the most of your resources in retirement. The idea is to match up guaranteed income sources to provide an income stream that will take care of your "needs” – these income sources could come from pensions, Social Security, dividends, fixed income, etc. This way, regardless of volatility in the stock market or economy, you know you have an income stream that pays for your shelter, keeps your bills paid, and provides a secure retirement. The remaining expenses, or the "wants," can be addressed through systematic withdrawals from traditional investments allowing you more flexibility during times of volatility in the markets. These more flexible assets can be sold when additional funds are needed but, more importantly, provide growth to keep up with inflation.
Retirement Mistake #2: Not creating an income strategy
Since you will no longer have an employer providing a paycheck, it is critical to start thinking about how you will create a paycheck for yourself in retirement. Developing an income strategy from your assets is extremely important rather than merely taking money out of your account's growth each time money is needed. It is crucial to determine how much income your portfolio can create through fixed income and stock dividends to match up to your expenses, keeping in mind the “needs” mentioned above. Some assets that are often used to create income include Social Security, pensions, dividends, bonds, or rental income.
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Retirement Mistake #3: Not accounting for inflation and miscalculating your cost-of-living
It is critical to address the long-term impacts as life gets more expensive, also known as inflation. All too often, inflation is an area we often see miscalculated or missed all together. This calculation will have a huge impact on your retirement planning if not accounted for properly.
Not only do you need to consider inflation, but if you are considering a move, we often see miscalculations when it comes to cost of living changes. Different areas in the country (and throughout the world) have very different living expenses. Without addressing these potential changes to your expenses with a move, you are likely to either run into significant pitfalls or you may miss planning opportunities for efficiencies.
Retirement Mistake #4: Not preparing for taxes
Believe it or not, taxes are typically the single largest expense we see in retirement. Forgetting to plan for the tax impacts on your assets in retirement can be a fatal mistake. Strategic planning around long term tax planning is not something to be overlooked and, if done properly, can significantly reduce one of the largest expenses you experience in your retirement.
For those moving, not only will living expenses change when you move into retirement, but you’ll need to adjust for new taxes, as well. Depending on the makeup of your retirement assets you may find distributions can be taxed differently based on the type of account or gains you have experienced. Many retirees may move to another state based on location but with little research on how this may impact their retirement income strategies mentioned above. Very often, we find significant differences in not only the cost of living, but in state taxes from sales to income taxes.
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As an example, I had a client who was moving from a state without an income to tax to the state of California, which does have a state income tax. In addition, California also has a significantly higher cost of living as compared to their home state. Although this may not be a reason not to move, it would be essential to prepare and understand what additional costs you will need to budget for. In this particular case, we had some funds saved in Roth vehicles, which helped minimize the differences in tax and other expenses between states. Still, you may want to consider how your assets would be taxed both federally and in the state you move to and adjust minimize your impacts.
Retirement Mistake #5: Not planning for the unexpected
Even if you have addressed steps 1-4, if you miss mistake number 5 you can find all of your hard work and planning is for nothing. One of the largest retirement mistakes we often see is not preparing for unexpected expenses. Unexpected expenses can range from health care to long-term care costs, or even your kids knocking at the front door to move back in. It is vital to have flexible assets in retirement to ensure you are able to take a significant lump sum distribution as needed for these unexpected situations. Beyond that, it can be helpful to have a buffer for expenses you may have forgotten in your calculations above. This flexibility should come in the form of both access and taxation.
As you plan for your retirement, we hope this list of common retirement mistakes and pitfalls helps you plan ahead, avoid them, and leaves you feeling more confident in your overall plan and strategy. From expenses to income to inflation, there are many points to consider as you move into retirement. To chat about one or more of these retirement strategies in detail and learn about how they may be applied to your specific situation, please schedule a call with a member of our team below!