“Avoiding Common Retirement Pitfalls“

There’s no such thing as one-size-fits-all retirement planning and planning the perfect retirement may be a pipe dream.  For many folks, their view of what retirement will look like tends to change after the first few months of leaving employment.  Additionally, some people realize just how expensive retirement can be and this tends to lead to irrational decisions when it comes to their investments.

Rather than trying to hit home runs with retirement planning, investors will be well served by emphasizing fundamentals and aiming for singles and doubles along the way. One way for investors to do that is to get out of their own way and not commit common retirement mistakes.  In this article we explore just a few of the common “mistakes” retirees make.  (Note: as noted above, retirement isn’t one-size fits all.  Someone’s “mistake” might be another persons “right decision” so please consider context for your personal situation).

Selling During a Bear Market

One of the most common retirement errors is selling in the middle of or at the bottom of bear markets. Rather than hitting the panic button in bear markets, retirees may do well to adjust allocations and maintain a long-term outlook. That way, they can still have exposure and capital with which to benefit when markets inevitably rebound.

“Consider moving a portion of your assets into investments that are more likely to weather market disruptions. We suggest that retirees keep a portion of their retirement portfolio in cash or cash alternatives and use that to help fund expenses,” says Rob Williams of Charles Schwab. “Then, consider allocating some to less-volatile investments, such as high-quality short-term bonds or short-term bond funds. This can help reduce the risk in a downturn and can be especially important early in retirement.”

Claiming Social Security As Soon As Possible

Another oft-repeated mistake many retirees make is claiming Social Security too early. Workers become eligible for that benefit at 62 years old, but by exercising some patience, their Social Security checks will be significantly higher if they wait to claim their benefits.

Individuals who collect Social Security beginning at age 62 receive 25% less in monthly benefits than if they had waited until full retirement age (FRA)—and roughly 43% less than if they had waited until age 70.   Also, under current legislation, social security benefits increase with inflation, so the larger your starting monthly benefit, the larger the inflation benefit will be in the long run.  Waiting to collect can also help extend the life of your portfolio. True, you’ll have to rely on your savings alone if you retire several years before you start collecting Social Security, but the increased income that comes with deferral—which is guaranteed for as long as you live—can help preserve your portfolio later.

Being Passive in Tax Planning

Any time I meet with a client who has a sizeable 401K (or similar pre-tax retirement plan) and show them what their estimated required minimum distributions (RMD’s) will be when they turn 73, they are shocked.  Most people don’t fully appreciate that the IRS tells you how much you HAVE TO take out of your pre-tax retirement accounts from age 73 onwards.  For example, they see $1,000,000 in their 401K and assume that they will have complete control of when they take that money and how it is taxed during retirement.

The earlier that someone can begin planning for taxes, through roth contributions/conversions and potentially charitable giving, the better.  Additionally, thinking about how income taxes could affect beneficiaries of certain accounts can also be a useful exercise.

Retirement can absolutely be a wonderful time in life.  Planning ahead and taking the necessary steps before these important years to have a plan in place can greatly increase your chances of having a rewarding retirement.