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June 29, 2024 | Jeff Gill
7 Critical Retirement
Mistakes and How to
Avoid Them!
Introduction
Will you be the next greeter at a famous big box store?
27% of retirees are either working or looking for work in retirement. Gone are the days of retiring at 62 and enjoying travel and leisure in the golden years.
The glory days are being taken from Americans. A T.
Rowe Price Retirement Savings & Spending Study found that 20% of Americans are working in retirement and another 7% are currently looking for employment.
For those that have already retired, it may be too late, but here are 7 things that they could have done to prevent the need to work in retirement.
Do not fall prey to these retirement thieves!
Key Mistakes Leading to Working in Retirement
Not Saving Enough
Withdrawing Money Too Early
Investing Too Conservatively
Overspending in Retirement
Not Delaying Social Security
Underestimating Healthcare Costs
Not Having a Financial Plan
The sad thing is if the current retirees had investigated these 7 areas of concern 10 years prior to retiring, most would be living a
different life.
Let's look at how easily each could be carried out.
Not Saving Enough
You may ask, how much do I need to save?
I speak to a lot of pre-retirees and 8 out of 10 only save what the employer matches in the employer's saving program.
And as we all know, only a few employers still have a pension left. So, if your employer matches 5% and you put in 5%, this may not be enough as many factors contribute.
Most experts recommend that you save 10-15% of your part for retirement.
I am not sure how that statement can be relevant for all as the main focus is income in retirement – expenses.
You can have a million in your 401K or TSP and the 4% rule will only provide $40,000 per year in income.
This could be enough for some and not enough for others, so it is best to know your numbers.
Withdrawing Money Too Early
This is a big one and a hard one to overcome.
I see this too often, and if you ever do it once, it is too easy to go back to the well over and over.
I see many pre-retirees that have borrowed from their retirement accounts, and they do not really understand the effect this habit will have on their future.
Once you do this, you interrupt the power of compound interest, and this account will never recover to its earlier potential.
You would need to ask yourself some tough questions.
What got me in this position to risk my financial future?
Is taking money from my retirement account going to fix that problem or just patch it?
Sometimes the easiest route is not the best.
Investing Too Conservatively
With the uncertainty in today's economy and the fear-mongering press, Americans tend to have their emotions fuel their investment decisions.
We are all in this boat together and it's hard to push all the noise away. So, what happens is many Americans err on the side of caution, eliminating all market risk.
They do this by putting a large, if not all, of their savings into what they think are the safest investments and accept the lowest possible return.
You find that many investors keep a sizable portion in CDs, Money Market Accounts, or Treasury Funds like for federal employees is the G fund.
They seem safe to conservative investors, but I think they're wrong.
The biggest risk is hidden and is there robbing your buying power every year.
Inflation is there no matter what your return is, and it eats away at your buying power and your right to the greatest wonder of the world according to Albert Einstein – the power of compound interest.
For the last 10 years, US Bank CDs have averaged 1.45%.
The G Fund has averaged 2.18%.
The average inflation rate for the last 10 years was 2.44%.
Some may think this is not too bad, but wait, do not forget the tax that you must pay on the return of the CDs and the investments coming from the TSP or 401K.
Now the numbers don’t look that great.
A good advisor can help you make the comparisons to ensure you're not on the losing end of inflation.
Overspending in Retirement
This is not a hard one to solve but difficult for many.
We have worked our entire life, many of us 30 to 40 years in the same profession to retire, and we all have the desire to celebrate.
I believe we all should, and it is now time to do the things that maybe your schedule has not allowed in the past. This can all be planned for, and it will not be an issue.
Many may say, wait, I have worked my whole life, and I don’t want to live on a budget.
And we convince ourselves that we deserve certain things and forget about the impact.
As in life, everything compounds, good or bad.
It's just a decision you must make which side do you want to be on.
We raise our children to tell them they can be and do anything they want in life; you just have to do the challenging work and plan it out by setting goals and measuring results.
When it comes to our finances, would that be any different? Do we have a special exemption?
Everyone needs a reality check and to look in the mirror at times, and this is one.
Doing the work in your financial plan gives you the permission slip to enjoy yourself in retirement and live by your rules that you create, not the rules created by others.
Not Delaying Social Security
If you look up when I should take Social Security, you will find 10 different opinions.
As humans, we always look for and gravitate to those that tell us what we want to hear.
Sorry if you don’t get that from me, but to get your information about what age to take Social Security from a YouTube video is not the best advice for you.
And you ask why I say that? It's simple: you and your finances are unique to you, and there is not a special number to make sure you get the most back from the broken system.
Don’t get us wrong; I’m not saying you don’t have a number (age) that would most benefit you, but it requires looking at many factors.
As we are working and saving through our working years, we focus on the substantial number, how big the 401K, TSP, or IRA is. This number grows to what seems like a considerable number and it can be misleading.
In the 70’s, if you had a million dollars, you were set for life.
Today, it gives you a great feeling and hope for retirement. Today, people are living 20-30 years in retirement, so I ask, what number do you feel should be the focus?
Should it be total asset value or income?
We pay our bills and buy groceries with income, net asset value.
I could write for days about this subject and the lies we have been taught, but I will save this for later.
To solve the problem of taking Social Security too soon can be worked out by creating a financial plan and looking at what is the best scenario for you.
It can make an enormous difference in your quality of life and for your spouse as well.
Do not make this decision without looking at all the numbers. As a rule of thumb, each year that you delay will increase your monthly benefit by 7% per year.
Here is a link to look at: Social Security Quick Calculator.
Working with a planner can help you align your plan to maximize your total monthly income in retirement.
Underestimating Your Healthcare Costs
With the rapidly rising cost of healthcare, it can be difficult to keep up.
The mistake I see is that people ignore the yearly increase and do not include them in their plan.
For example, the past rule of thumb annual estimate is $3000 per year in average expenses, but the data is much different.
The 2023 average medical expense per retiree was $6874 per year.
This discrepancy can strain your monthly budget. It could lead to tough choices about expenses and doing without needed items.
The next biggest medical expense would be Long Term Care and Home Health Care expenses.
No one likes to talk about this, and it's always put on the back burner. This can be a huge mistake as we have discussed above; ignoring the risk usually never works in your favor.
Especially something that a person could have easily planned for to mitigate the financial risk.
In these cases, it's best to create a plan and keep it up to date so the risk is mitigated to your benefit once again.
Not Having a Financial Plan
If I told you that I have one thing that, if followed, would give you the life you dreamed of, would you, do it?
If I told you that I have a magic blueprint that will lead you to the retirement dreams that you have daydreamed about while driving to work every day, would you, do it?
If your answer is yes, then why do so few do it?
Statistics show that only 23% of Americans have a Financial Plan in place.
They also show that 56% of retirees feel that they do not have enough for retirement. These are closely related.
You cannot borrow money to start a business without a business plan. You need a blueprint and many times engineers have approved plans to build a house.
A map to drive to an unknown place. So why would you leave the critical point in our lives to change without a Financial Plan?
I am not saying that it's a guarantee of success but take a close look at the other 6 main retirement risks, and everyone could be addressed in a good Financial Plan.
I suggest that every family, no matter what their financial status, work with a planner to start their financial journey. The younger you start, the better.
Contact your financial planner of choice and start the process. It will not be a decision that you regret 20 years from now!
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