By Donald Albach
Making mistakes is an inevitable part of our human experience, and those mistakes often serve as valuable learning opportunities. But when it comes to retirement planning, there’s no room for trial and error. The financial transition into retirement shifts your focus from earning and accumulating wealth to relying on it to sustain you throughout your golden years. Even if you’ve diligently planned and saved for decades, retirement demands ongoing attention and informed decision-making. To keep your retirement journey on track, it’s critical to identify and steer clear of common mistakes. Let’s explore five of these pitfalls and discuss tips to help you avoid them while easing into a stress-free retirement.
1. Overspending in Retirement
Do you know what you will do with your newfound freedom in retirement? Many people start by pursuing all the things they didn’t get to do while working—traveling the world, picking up a new hobby, remodeling their home, and the list goes on.
But many people underestimate the amount of money they’ll spend in those first few years of retirement. With so much extra time on your hands, it’s easy to make a lot of little purchases that add up to a lot over time.
If you want to avoid this mistake, create a detailed but realistic budget and stick to it. Yes, you can budget for extras such as a vacation or a new hobby, but make sure you know how it will affect your nest egg before you follow through with it. And be sure to work with your advisor to find a withdrawal rate that will stretch your money for as long as possible.
2. Underestimating Healthcare and Long-Term Care Costs
Retirees receive Medicare after age 65, but most of the time, this isn’t enough to cover chronic healthcare needs in retirement. For example, did you know dental, basic vision, over-the-counter medication, and long-term care are not covered by Medicare?
The average couple at age 65 will spend $315,000 after tax on medical expenses. What’s more, the real retirement enemy often comes in the form of long-term care costs. Nearly 70% of retirees will need some form of long-term care during their lifetimes, and with average long-term care costs hovering around $315 per day or $9,584 per month for a private room in a nursing home, it’s critical for you to have a plan in place to cover these expenses.
First, cautiously watch your spending in retirement to ensure there is a financial margin in place to protect you when larger medical bills hit later in life. And when choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. Finally, explore your long-term care coverage options, such as traditional long-term care insurance, life insurance with a long-term care rider, and annuities with long-term care riders. The earlier you get coverage, the better, since the older you get, the higher your cost for a long-term care insurance policy will be and the greater the likelihood of your application being denied.
3. Overreacting to Stock Market Volatility
Retirees usually want to play it safe in the stock market, by investing conservatively and safeguarding their nest egg as much as possible. But when you play it too safe, your savings can’t keep up with inflation and you end up losing money down the line. With inflation hitting a staggering 9.1% in 2022 and still hovering around 6% in February 2023, most retirees can’t afford to avoid the stock market volatility that comes with investing at least a portion of their savings in growth assets.
Since your retirement may last anywhere from 20 to 30 years—as much time as you’ve spent in the workforce—don’t get caught up in investing too conservatively just to avoid short-term volatility. When your portfolio is too conservative, inflation becomes the biggest threat to your assets.
4. Claiming Social Security Too Early
Don’t assume it’s best to start collecting Social Security at age 62 (or at full retirement age, for that matter). If your full retirement age is 66, for example, you could receive a 32% increase in monthly benefits by waiting to collect Social Security until age 70. This means if your standard benefit amount is $1,500 per month, you could receive $1,980 by waiting four more years. This equates to thousands of extra dollars over the course of your retirement.
When deciding when you should start collecting Social Security, consider the size of your nest egg, your retirement date, and the current state of your health. Calculating when to claim your benefits is both an art and a science. If you need help, reach out to a trusted financial advisor who can help you run the numbers.
5. Miscalculating Taxes on Retirement Income
Your retirement accounts are all taxed differently. If you don’t have a strategic withdrawal plan in place, you could end up with a large tax bill at the end of the year. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability.
Speak with a financial planner or tax advisor about creating a tax-efficient distribution strategy for retirement. This professional can look at your tax bracket, retirement accounts, and Social Security to help you withdraw money in the most tax-efficient way.
A Partner You Can Trust
While it’s impossible to avoid all mistakes, taking proactive steps can pave the way for a fulfilling retirement with fewer hurdles. At Millstone Financial Group, we have the knowledge to assist you in navigating the complexities of wealth management while steering clear of the costly mistakes often come during retirement.
As your dedicated partner on this journey, we can collaborate to establish a realistic budget and devise a tax-efficient distribution plan that maximizes your savings. Reach out to us today to schedule a complimentary consultation by calling (732) 385-8544 or emailing [email protected] to learn more about our services and how we can help you pursue a comfortable and stress-free retirement.
About Don
Donald Albach is President and Co-Founder of Millstone Financial Group, an independent financial advisory firm helping pre-retirees and retirees pursue their retirement goals. Don has over 26 years of experience in the financial industry and focuses on retirement planning, designing retirement income planning strategies to guide his clients toward financial independence. Don graduated from Norwich University, the nation’s oldest private military college, and has worked his entire career in the financial services industry, including First Boston, MetLife, and C&A Financial Group. He co-founded Millstone Financial Group in 2012 with Michael Russo. Don and Mike met each other while working at MetLife, and in 2003 both he and Mike were recruited to work at C&A Financial Group, where they spent the next 10 years. It was at C&A Financial Group where they decided they needed to start their own company that strictly focused on retirement income planning. They both had a desire to help people navigate the complexities of retirement and created Millstone Financial to do just that.
Don currently lives in Monroe Township, NJ, with his wife, Tina, to whom he has been married since 1992. They have three children together: Paige, Donny, and Ally. Don’s two passions are sailing and watching college football, and he also enjoys cooking Sunday dinner for his family. To learn more about Don, connect with him on LinkedIn.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company. Millstone Financial Group Limited Liability Company is not affiliated with or endorsed by the Social Security Administration or any government agency.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
