Retirement planning is, in many ways, a guessing game. You can’t be sure of exactly how long you will live. How much income you will need might not be clear. And you don’t know if you will need long-term care support.
Even so, prudence dictates that we have some roadmap for these unknowns. It’s better to plan for these contingencies. Otherwise, you could wind up in financial trouble at some point in your retirement years.
Here are five financial fails to avoid in retirement so you will be better prepared when you retire.
Watch Out for These Financial Fails in Retirement
This isn't an exhaustive list, but many retirees find themselves winding up short due to these five pitfalls:
1. Not Saving for Retirement
People are living longer than ever. Thanks to advances in technology, medicine, and wellness, retirees can easily live into their eighties or even nineties. While that is an impressive milestone, you may also face an extended span of years to cover financially.
Those who don't save will have to settle for a retirement lifestyle that is less than what they envisioned. You can avoid this dilemma by putting away money while you are still working. That will increase the chances of you having the means to fuel your lifestyle when you retire.
As you gear up for retirement, go through a thorough review of your spending now. Use it as a guide to what your expected retirement spending needs will be. Separate your expected retirement expenses into two areas: essential spending, and discretionary spending.
When those snapshots are in hand, you will need to see how much money you might need over time. Multiply those numbers by at least 30. Why? Remember, people may spend one-third of their lives in retirement and, as a result, have decades of income needs.
You want to know how much money is needed -- including your life savings and proceeds generated by your retirement portfolio -- in order to cover these expected lifetime income needs.
2. Not Having a Retirement Income Plan
Like many people, you probably had some sort of investment plan for your working years. You had a defined path for accumulating wealth as you were progressing in your career. It meant following a personalized strategy that was tailored to your timeline for investing, risk tolerance, and financial goals.
Just like in the working years, retirement also requires a plan, but not just any plan. Now the goal is to ensure you have income certainty.
Employment or full-throated entrepreneurship likely won't be your primary household income stream in retirement. You will need to determine how to replace these sources with new predictable income streams once you retire. Here are some questions to think about as you work through your retirement "what ifs."
Will Social Security play a major role? How much will you rely on returns from your portfolio as a major income source? Do you have a pension?
Can you do anything to reduce your "reliance rate" on your portfolio's performance for generating a certain reliable income number each year? Does your spouse have any employer plan or pension that will also figure into your income puzzle?
All of these are questions that must be answered. What are the risks otherwise?
Underspending or overspending in retirement. That can mean not only an unpredictable, ever-changing lifestyle, but one that can greatly impact your future quality of life - especially if sequence of returns risk should strike.
Talk to your financial professional now, especially if you are in your 50s.
3. Not Having a Proactive Strategy for Emergencies
As we move from midlife into retirement age, health situations change. Our needs for medical and healthcare services increase, thereby also increasing our spending for these services.
Your retirement plan needs a backup strategy in case an emergency should happen. You should know how to be secure financially if anything bad happens physically.
To that end, incorporate Medicare into your plan. What does it cover? What will you be responsible for out-of-pocket? Have a game plan for long-term care situations. Make sure to include survivorship strategies in your plan if you have a spouse or partner.
As a starting discussion point, Fidelity has estimated the total healthcare and medical costs that a 65-year-old couple retiring today may pay out. Keep in mind that these are just estimates. Not only that, people use healthcare differently, and your total costs will depend, in large part, on the kind of health insurance coverage you have.
Healthy individuals may go to healthcare providers frequently to ensure they are in tip-top shape. Others may be less healthy and less frequent in their use.
You also have a variety of options for coverage with Medicare in retirement. In exchange for supplemental plan premium payments, a Medicare supplemental insurance plan will generally shoulder a majority of health costs compared to other kinds of Medicare coverage.
Be sure to speak with an experienced financial professional who can help you explore your choices. The estimates from Fidelity can be seen below.
The end-goal is to have as few disruptions as possible to your financial stability should bad things happen, especially if something happens to you or your spouse. Usually this will entail the purchase of additional forms of insurance, such as a Medicare supplemental plan or a prescription drug plan.
4. Not Educating Yourself on the Fundamentals of Retirement
To make the most of your money in retirement, it pays off to have a baseline knowledge of certain retirement issues.
What are some examples? Social Security -- and how the age you claim your benefits affects your lifetime payouts. Medicare -- and how the health insurance plan can impact how much you pay out-of-pocket for retirement healthcare.
It's also helpful to have a basic awareness of the tax treatment of your different accounts -- retirement accounts, brokerage accounts, and external investments. The taxable status of withdrawals from these accounts will influence how you tap them for income.
All of that being said, many people struggle in their knowledge of these retirement issues.
According to the Transamerica Center for Retirement Studies, over half of Americans say they know "very little" about Social Security. Nearly 6 in 10 people haven't attempted to calculate how much they will need in retirement savings to live comfortably, according to the Employee Benefit Research Institute.
Understanding these fundamentals helps make it easier to work through the different possible outcomes, such as maximizing your Social Security lifetime payouts. In turn, you can make these important decisions with more confidence.
5. Ignoring Debt Loads Heading Into Retirement
Many households will have a mortgage when they retire. But several retirees also carry excessive levels of other debt. This includes credit card debt, vehicle loan debt, and, perhaps surprisingly, student loan debt as well.
According to Chris Farrell, a Forbes contributor with NextAvenue, the median total consumer debt of retiree-led households in 2016 was up 250% from its level in 2001. Six in 10 retiree-led households (60%) carried some debt, compared to just 42% in 1992.
For most households, housing costs will be the biggest expense in retirement. Excessive debt loads can peel off large amounts of monthly income and divert it from other spending needs so they are paid off.
Be sure to explore opportunities to reduce or erase the red ink so you can 'free up' more income for your monthly spending and lifestyle goals. An experienced financial advisor can help you build strategies for this. They will also help you balance other priorities toward, ultimately, a happier and healthier retirement.
Bolster Your Retirement Strategy for Lifelong Peace of Mind
These are just some of the major mistakes you can make with your retirement. Don't hesitate to start working on these things now. There is no time like the present, and a head start will make all the difference.
If you need assistance with planning for your retirement goals and achieving more confidence, financial professionals are available at Jennifer Lang Financial Services. Contact us today.