After working for decades, most people are ready to relax and enjoy their retirement. However, it is easy for soon-to-be retirees to make mistakes that can leave them financially insecure and make their retirement neither relaxing nor enjoyable. Don't be an unhappy retiree — keep an eye out for these potential pre-retirement pitfalls as your retirement approaches.
- Poor Retirement Planning – What do you plan to do when you retire, and how much money will you need for those plans? If you haven't taken the time to map out your likely expenses, how do you know when you can afford to retire?
Once you have settled on your plans, set up your retirement budget well in advance. Take into account your expected lifestyle and build in reasonable cushions to account for contingencies such as poor health (see below). Retirees frequently spend more than they expected prior to retirement, so pad your budget accordingly and leave extra room for an emergency fund.
A good rule of thumb is to plan to draw out 4% of your initial retirement balance annually, adjusting for inflation at the end of each year. Can you live on that amount? If not, re-evaluate your plans or change your retirement date until you have the appropriate funds.
- Failing to Understand Retirement Income – Do not expect to live on Social Security benefits or the interest on retirement accounts alone. Think about your retirement income in cash flow terms, and plan out your Social Security strategy as well as your withdrawals from IRAs and/or 401(k)s. Planning your cash flows will help extend your nest egg, optimize your taxes, and identify weak spots where you need to build in contingencies. Seek the advice of a financial planner if you are having trouble plotting out your income and expenses.
- Poor Risk Balance – As retirement nears, you have less time to recover from a market correction, so you should shift your balance toward less risky investments such as bonds — but there is no need to go so conservative that your returns do not keep up with inflation. Check your portfolio annually and adjust according to your risk needs, or invest in a target fund that automatically adjusts your portfolio for you.
- Acquiring Too Much Debt – It may be tempting to buy that vacation home or take that expensive trip early in retirement, but you are better off entering retirement with as little debt as possible. However, if you do plan to buy another home, do it while you are still working, as it will be difficult to qualify for a loan with a fixed retirement income. Similarly, it is usually best to consolidate and refinance all the debts that you can before retirement to receive a better interest rate.
- Cashing in Retirement Assets Early – It is easy to look at the size of your nest egg and decide that you can tap into those assets before retirement, or to take Social Security Benefits early. Stick with the retirement plans you created above (you did create those plans, didn’t you?). Taking Social Security benefits early may make sense if you are in poor health or need to deal with financial difficulties early in retirement, but in general, it is better to wait.
- Stopping Your Saving – Some people think they have enough money entering retirement, while others assume they will never have enough and give up entirely. Keep a saving mindset as you enter retirement and not only will your nest egg grow, it will also last longer as you keep assessing the value of your purchases during retirement.
- Ignoring Health Care – Health care costs, including long-term care, will probably be your largest retirement expense. According to Fidelity, a 65-year old couple embarking on retirement together can expect to spend $245,000 in uncovered (out-of-pocket) medical expenses throughout the rest of their lives.
Make sure that you have enough salted away to cover health care costs, and consider your plans for long-term care. Many people erroneously believe that Medicare will pay nursing home costs. Speak with your children and make sure everyone's financial expectations are on the same page — do not just assume that they will shoulder the burden of your care.
Financial discipline built your retirement nest egg, and that same financial discipline will keep it intact as you move into retirement. Combine that discipline with sound planning, and the result is likely to be a happy and enjoyable retirement.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.