Planning for a Successful Retirement: Beware of Retirement Pitfalls with These Pillars of Protection
Posted in: Personal Financial Management
Planning always starts with how you decide to define your personal goals and dreams for a comfortable and satisfying retirement. Many retirees today are staying very active with volunteer work, travel and family. If you’re approaching your retirement, it’s important to not be short sighted, have all the right planning in place, and to avoid the common retirement pitfalls listed below.
Common Retirement Pitfalls:
- Starting your social security too early. According to the Social Security Administration, 74% of the 35.6 million retired workers received reduced benefits because of entitlement prior to full retirement age (Annual Statistical Supplement, 2012, ssa.gov). While delaying Social Security may not always be the right choice, it seems many are making the decision to start early without researching and knowing all the facts. Starting before full retirement age (FRA) could mean a loss of benefits due to earned income limitations, benefit reductions of up to 25% before FRA, and foregoing the 8% increases in benefits from FRA until age 70.
- Inflation. Not factoring in inflation and the effects of inflation on purchasing power. According to the U.S. Department of Labor Bureau of Labor Statistics, the average change in inflation per year from 1992 to 2012 has been an increase of 2.7%.
- Emergency funds. Not having enough cash to meet unexpected expenses such as needing a new furnace or roof.
- Ignoring the costs of long term care and health costs in general. According to Fidelity Benefits Consulting, a 65 year old couple may need $220,000 in savings to cover out-of-pocket medical expenses throughout retirement. This does not cover long term care costs and the 2011 average daily rate for a private room in a nursing home was $239 or $87,235 annually (2011 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs). We are living longer, but along with that can come fragility and chronic illness.
- Not keeping up-to-date beneficiary designations and legal documents. This could have devastating effects on your family. Properly named beneficiaries on retirement accounts allow your beneficiaries the opportunity to defer income tax for as long as possible by postponing withdrawals from the account. Naming your estate or not naming any beneficiary on a retirement account may negate the ability of your spouse or other beneficiaries to stretch out distributions. The IRS wins when you make this mistake.
The Pillars of Protection in Retirement outlined below will help you avoid falling into one of the common retirement pitfalls (mentioned above).
- Income Strategy
- Health Care and Long Term Care Protection
- Estate Planning – Planning for the Distribution of your Estate
Start giving yourself a paycheck from your savings in retirement. First, look at all your income sources and savings. Seems simple but there are many factors to consider, for example:
- How much will you receive from Social Security, pensions, rental real estate, etc.?
- Will your guaranteed income sources cover your basic living expenses?
- How much can you withdraw from savings each year and from which accounts will you go to first?
These are all very important questions and knowing which funding sources to tap in which order can significantly impact your taxes. Constructing a portfolio with the objectives of capital preservation, income, and growth is key because you will need to preserve what you have, generate income to meet your needs and grow to keep pace with the cost of living. Remember, it is likely that your expenses will double over a 20 year period. A postage stamp cost $0.15 in 1980 and $0.45 in 2012, a loaf of bread cost $0.52 in 1980 and $1.44 in 2012 and the average car cost $6,200 in 1980 and $31,228 in 2012 (United States Postal Service, Bureau of Labor Statistics, TrueCar.com). The construction of a comfortable asset allocation plan is both an art and a science and a dynamic, continuing process throughout retirement.
Health Care and Long Term Care Protection:
Health care costs are a primary concern to retirees and one of the biggest expenses in retirement.
Health care costs are the biggest unknown in retirement – specifically, out of pocket medical expenses and long term care costs. There is a 50% chance that at least one member of a 65 year old couple will live to age 92 (American Society of Actuaries, 2006). Your plan needs to address this issue as well as incorporate long term care protection which needs to be prepared for well in advance.
Estate Planning – Planning for the Distribution of your Estate:
Estate planning includes Beneficiary Designations, Medical Power of Attorney, Advance Medical Directive, Durable General Power of Attorney, Last Will & Testament, etc. Estate planning refers to legal planning for future disability or death. It addresses financial decisions, asset preservation, tax minimization, health care, and long term care needs.
When was the last time you reviewed the beneficiaries on your 401(k), IRA, life insurance, or annuity? This is one of the most commonly overlooked areas of financial planning. It’s a simple thing, but if missed could cost your loved ones dearly and make the IRS your biggest beneficiary.