There is plenty you can do to avoid running out of money in retirement, but you could be making mistakes that will sabotage the comfort of your golden years.
Be aware of these eight common blunders — some that many people make well before retirement age, and some upon leaving the workforce — and take action to avoid them.
Mistake 1: Failing to plan for medical expenses
Medicare kicks in at age 65, but that’s not the end of your medical expenses. Fidelity Benefits Consulting estimates a 65-year-old couple who retired in 2014 will need $220,000 of their own money for medical expenses over the course of retirement. Such costs include deductibles for Medicare Part A and Part B (in-patient and out-patient insurance), and premiums and out-of-pocket costs for Medicare Part D prescription drug coverage.
- Read “The ABCs of Selecting a Medicare Supplement Plan,” then, if you have further questions, call your state insurance commissioner’s office to get help choosing the most cost-effective Medigap plan.
- To help dodge expenses from illness and disability, exercise regularly and stay at a healthy weight. (Get a physical exam before beginning a diet or exercise program.)
- Check into long-term-care insurance. It’s cheaper if you sign up when you’re younger.
- Think about moving closer to good medical centers, hospitals and family.
Mistake 2: Underestimating costs
Retirement costs can be surprising — surprisingly high, that is. You may find that to manage costs, you need to earn some extra income — not the end of the world, but possibly not what you had in mind. If you do take this path, check the Social Security Administration’s rules for working while receiving Social Security benefits.
Take action: The good news is, in the emerging economy, it should be easier to find money-making opportunities that fit a retirement lifestyle: There are lots of jobs you can do from home, and lots of ways to earn a little money on the side. If you’re lucky, it may be something you love to do as a hobby — say gardening, tending pets, caring for children or working as a handyman. If you’re in the market for a new job, brush up your resume and skills. Check out “7 Tips to Find a Job in Retirement.”
Mistake 3: Celebrating retiring with a big purchase
No doubt you’ve got a wish list for retirement. But hold off on making major purchases at first. Instead, give retirement a spin and see what you’re spending each month.
Track expenses — every single one. A year’s tracking gives the best picture because it includes one-time and seasonal expenses.
Take action: It doesn’t matter what tracking system you use. Just find one you like and keep it up. Keep receipts, watch bank and credit card accounts online on a weekly basis, and update your tracking regularly. Here are a few approaches:
- Try free online budget programs. Money Talks News partner PowerWallet lets you track expenses automatically for free. It and other free money management services like Mint and BudgetTracker make money by recommending financial products and supplying coupons.
- Pay for a program such as Quicken.
- Do it yourself. Track expenditures manually and offline on a spreadsheet.
Mistake 4: Helping out adult kids
Many parents set themselves up for a crisis in retirement by supporting adult children financially. A study by Merrill Lynch says 60 percent of people 50 and older are assisting adult relatives financially.
If you are a parent who gives money to an adult child, remember the following: Adult children still have time to pay off college loans and save for retirement. Their parents — in other words, you — are running out of time to save for the golden years ahead.
- Make a concrete plan with goals and deadlines for gradually withdrawing financial help from your kids.
- Discuss the changes with your kids and help them learn to budget.
- Model financial restraint and responsibility for your kids.
For more tips, read “Still Supporting Your Adult Kids? 5 Steps for Cutting Them Off.”
Mistake 5: Claiming Social Security too soon
Waiting to claim Social Security benefits is one of the best investments around. If your full retirement age is somewhere between 66 and 67, your benefit check could grow by 32 percent if you wait until age 70 to collect, Social Security spokesman Michael Webb said in an email. If your full retirement age is 67, waiting until 70 yields a maximum possible increase of 24 percent.
On the other hand, about half of retirees take Social Security at the earliest possible moment — when they’re 62. U.S. News & World Report says:
Social Security benefits are reduced for workers who sign up at age 62, and the amount of the reduction has recently increased from 20 percent for people born in 1937 or earlier to 25 percent for baby boomers born between 1943 and 1954. … The reduction in benefits for people claiming at age 62 will further increase to 30 percent for everyone born in 1960 or later under current law.
This Social Security Administration table shows the reduction for taking early Social Security benefits depending on the year you were born.
- Go to SocialSecurity.gov’s My Account to see your estimated benefits. If you’ve paid into the Social Security system, you can create an account and pull up a statement showing what you’ll earn by claiming benefits at various ages.
- Keep your current job if you can and delay retirement. Or get a part-time job that helps you hang on longer before claiming benefits.
- Hire a Certified Financial Planner to review your retirement plan, income and expenses with you.
Mistake 6: Forgetting about the tax man
The IRS won’t disappear from your life when you retire.
For instance, traditional tax-deferred retirement plans like 401(k)s and IRAs require you to withdraw a minimum amount each year beginning in the year you turn 70½. If you don’t, you could be hit with a big penalty.
You can read more about required distributions at this page of the IRS website.
Good planning, especially before retirement, can help manage the tax bite. One strategy, Money Talks News founder Stacy Johnson says, is to roll a portion of retirement savings into a Roth retirement plan, which has no minimum distribution requirements. Roth plans require taxes to be paid before money goes in. You withdraw the funds tax-free later. The strategies you use will depend on your income now and what you expect it to be after retirement.
Take action: Make a plan — or get expert help making one — that takes taxable retirement income into account.
Mistake 7: Ignoring estate planning
Get your affairs in order before you’re ill or old so you’ll have control over where your money and possessions go. It’s a kindness to your heirs, too, because they won’t be saddled with the work.
- Make or update your will and, if appropriate, make a revocable living trust.
- Sign a durable power of attorney naming someone you trust to make your legal and financial decisions if you cannot.
- Assign health care power of attorney to someone to make your medical decisions if you’re unable.
Mistake 8: Investing too conservatively
As retirement grows nearer, it seems prudent to invest more conservatively. But you could live another 20 or 30 years. Savings held too conservatively shrink because of inflation. A portion of your funds needs to grow.
“Never taking risk means taking a different risk,” Stacy Johnson says.
Take action: Learn about investing so you can be confident in taking measured risks to earn gains, even as you grow older. It’s not difficult to put up the basic rules for sane investing — how spread risk among diverse holdings, how to use index funds as a low-maintenance investment strategy, how avoid paying excessive fees and how to adjust your exposure to risk so that it decreases as you get closer to withdrawing the money.
What provisions are you making for your retirement? Share with us in comments below or on our Facebook page.