The timing could not have been worse. The largest generation of retirees in our nation’s history is entering their retirement years during the worst economic downturn since the Great Depression. Not only have baby boomers witnessed their retirement accounts shrink by as much as 50% during 2008, they also have to deal with anemic yields on bonds and CD’s, a decimated real estate market, and record high unemployment rate. Coupled with a significant increase in life expectancy thanks to modern medicine, retirees certainly have their work cut out for them.
Fortunately, it is never too late to start the retirement planning process. But retirees need to avoid many of the common mistakes because the acceptable margin of error is much smaller than ever. Here are 5 of the most common mistakes made by retirees, and how to fix them.
- Having a Plan with Outdated Assumptions. While most people who are near retirement age have a sense of how much assets they have accumulated, how much they will need to spend in retirement, and how long their money might last, most of people fail to have those numbers checked against different market conditions. As long as the world economy continues to struggle, one needs to challenge the conventional wisdom regarding expected annual rate of return, inflation rate, GDP growth, etc, because any one of these macroeconomic factors can easily derail a carefully crafted retirement plan. Therefore, potential retirees should consider updating their plans using a variety of market returns assumptions (both good and bad), rate of inflation (both benign and extreme), and other macro factors. If your numbers come up short, it’s time to consult a professional.
- Retiring Too Soon. Working even a few years beyond what you’ve planned can pay a surprisingly large bonus in retirement security. Social Security defines age 66 as the typical retirement age for most people, but about half of all Americans don’t wait that long. You can avoid the early-filing benefit reductions imposed by Social Security by working until your full retirement age (as defined by IRS). At the same time, you can keep contributing to your retirement-savings plan, building additional balances that can be put to work in the market. Every additional year of working income is a year in which you’re not supporting yourself by drawing down retirement balances. The upshot is that staying on the job a few additional years can boost your income in retirement by one-third or more.
- Underestimating Health Care Cost. Even for those on Medicare, health care costs can erode spending power and economic security for most retirees. Out-of-pocket expenses for people in retirement have jumped 50 percent since 2002–and that doesn’t include the possibility of needing long-term care insurance. Health care costs pose one of the most serious risks to retirement security, so it’s important to understand how to plan for this major expense, navigate the system and manage your spending. There are many public and private resources available to help you plan. Do not wait until retirement to seek advice.
- Not Diversifying Your Portfolio. It is not uncommon for a retiree who has worked at the same company for many years to accumulate a large amount of that company’s stock in his or her portfolio. Some retirees choose not to diversify because they feel that they “know their company the best”, and others simply neglect to do so. From a diversification and risk management perspective, a retiree’s investment portfolio should hold no more than 5% ~ 10% of any one particular stock, so that ones portfolio can be protected should an investment goes awry.
- Putting the Kids College Before Your Retirement. As I’ve told many of my clients, “there is always college aid for your kids. But there is no retirement aid for you other than yourself”. A retiree should never jeopardize his or her own retirement by either withdrawing, or borrowing from their retirement accounts to help fund their children’s college education (or home purchase, wedding, car, etc). Instead, they should focus on building and protecting their nest egg to last them through their golden years.
It is never too late to start planning for your retirement. If you find the task of mapping out your financial life for the next thirty years overwhelming, it might be time to lean on professionals to get a second opinion.
By Andrew Chou, CFP®
Special to FPA