Chances are, planning for retirement is one of the most important steps you will undertake. Unfortunately, we have met people who did not focus enough on making thoughtful decisions during their retirement.
Maybe they overlooked something important. Perhaps they veered off course from one or more of our strategies. As a result, much of our hard work and planning during the pre-retirement period of our life can unravel once we enter our golden years. This may put our retirement dreams and even our fundamental financial security in danger.
Whether you're retired or still on the path there, it's a good idea to learn some moves you can make to avoid big financial errors during retirement.
This blog provides a closer look at key mistakes, and how to sidestep them.
Mistake 1: Overspending.
People with modest means, and even very affluent people with significant wealth, can find themselves overspending to the point where they're in some financial trouble. People with high incomes while working can spend as they like during their careers without problems. So, they don't create budgets or watch their cash flow the way others may need to do. Once their incomes go away or are reduced, they lack clarity on how much money they need for the long haul.
The other main driver is simply getting carried away by "living it up" during retirement (especially in the initial years, when the thrill of newfound freedom can feel intoxicating).
Our advice is to evaluate your income needs accurately going into retirement and modify plans as necessary throughout your golden years. Pay attention to cash flow numbers and how they fluctuate. That analysis should be a foundational part of your overall wealth management plan, along with other regular check-ins that enable you to see where you're at. Our clients can use the budgeting section of their client portal to help manage and track their cash flow.
Mistake 2: Avoiding "money talks" with family.
Too often, the heads of families don't discuss anything to do with finances with their heirs. As a result, family infighting can occur when assets transfer (or don't transfer, as the case may be) to the kids and other relatives. In the worst-case scenarios, family wealth is destroyed, and family relationships are torn apart.
Consider working with your family members (and trusted financial professionals) to create a formal family mission statement that spells out your family's values and how you use your finances to support those values. Such clarity can help heirs (and others) understand why family money is allocated and passed on in specific ways.
Mistake 3: Making missteps with Social Security.
Social Security payments can be an important component of retirement income even for those with significant financial assets. So, it makes sense to avoid mistakes that could erode what Social Security might offer you. It's generally well-known that claiming benefits too early can come back to bite you.
Other, somewhat lesser-known potential mistakes include:
Waiting too long to claim.Some people should consider claiming on the early side. They include (but aren't limited to) single people in poor health who are unlikely to live several more decades and married couples who are both in extremely poor health.
Avoiding work due to earnings limits.If you claim Social Security before January 1 of the year you reach full retirement age and earn above a certain threshold, your benefit is reduced by $1 for every $2 excess earnings. Rather than saying no to paid work because of that fact, it can be smarter to keep generating income. The reason: The government will adjust your benefit upward once you reach full retirement age meaning you may very well recoup the money you lost.
At Financial Journey Partners, we have financial planning software to help our clients determine the best time for them to start taking Social Security.
Mistake 4: Using the "wrong" withdrawal strategy for income.
The "right" strategy will vary depending on an individual's goals and other factors. That said, it's easy to use an approach that is inefficient or suboptimal in some way. A withdrawal strategy should factor in (among other things) health and life expectancy, income timing needs, and how various accounts may be taxed if you pull from them.
Advice: Don't assume a "rule of thumb" approach such as the “4 percent per year withdrawal rule” is automatically right for you simply because it's relatively easy to understand. However, don't discount it because it seems too simple and straightforward. Consider various options and we recommend completing a financial plan for a thorough analysis.
Mistake 5: Making investing your new part-time hobby.
Faced with lots of extra time, some retirees decide it's a great time to "play the markets." This can occur with self-made individuals such as former entrepreneurs, who might assume they can easily apply their business success skills to investing and achieve similar results without breaking a sweat.
That overconfidence can lead to classic investment errors, investing too aggressively, chasing hot tips, over-concentrating assets in a single company or sector, excessive trading that cuts into returns or boosts taxes owed, and others. Don't turn your wealth into a new game or hobby.
We recommend people consider using a financial professional to help people develop an investment strategy that is:
- A diversified investment strategy
- Has the appropriate level of risk for the person
- Considers a person’s investment horizon
- Is tailored to the needs of the person
There are many ways to potentially jeopardize your financial health in retirement. After an investing mistake, there may be less time and fewer ways to recover from big financial mistakes once you're out of the workforce. That's why it's so important to take steps aimed at helping you continue to make informed decisions about your wealth, even as you look to enjoy life to the fullest. At Financial Journey Partners, we’re known for helping our clients make smart decisions, so they can do the things that are most important to them and enjoy the journey.
For people who are not clients of Financial Journey Partners, we offer a Second Opinion Service to review your situation and answer any of your questions. We will let you know if we can help you. But if we cannot help you, if we know someone else who can help you, we will introduce you to them. For clients of Financial Journey Partners, if you have any questions about the issues above, please talk directly with your Wealth Manager.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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