You have saved and invested for decades, and now you are preparing for retirement, or maybe you have already left your job. While the idea of leaving your career behind may be appealing, it is a monumental change that can also be unsettling for some folks.
You will be sailing in a new direction, and you will take on new challenges. Your daily routine will dramatically change, and you’ll begin to rely on a lifetime of savings. Here’s how to prevent a retirement trap.
What should you do?
- A more conservative investment posture may be in order. There was little reason for concern when you were 30-years old, and volatility struck. In fact, the idea of dollar-cost averaging and buying shares at a lower price may have been appealing. Besides, the market has a long-term upward bias, and it would be decades before you would tap into your 401k or IRA.
But today, market volatility can be much more disruptive. A significant decline in stocks at the onset of retirement could create substantial problems down the road. We’ll handle these conversations at your leisure, but a shift towards assets that are not as volatile may be more suitable.
It’s not that we want to altogether avoid equities. Some may be tempted to exit stocks. That might not be the right choice either.
Instead, we want to take on the right level of risk. In most cases, some exposure to stocks is the best path. But the growth-oriented strategies of your youth that helped build your nest egg should probably be tempered in retirement.
- Be careful taking Social Security too early. There are some reasons to opt for Social Security when it becomes available at 62. For many, however, that will reduce their lifetime earnings from Social Security.
Today, the full retirement age runs between 66 and 67 years old, depending on the year you were born.
Individuals who collect Social Security beginning at age 62 receive [https://www.ssa.gov/oact/quickcalc/earlyretire.html 25% less in monthly benefits] than if they had waited until full retirement age. This assumes a full retirement age based on a date of birth between 1943 and 1954.
Delaying Social Security until 70 allows you to receive the maximum available benefit. It will provide you with an additional 32% over what you’d pocket at full retirement age [https://www.ssa.gov/benefits/retirement/planner/1943-delay.html assuming full retirement age based on a birthdate between 1943 and 1954] (both examples are for illustrative purposes only).
Rules governing Social Security are complex, and the information we’ve provided is simply a general overview. Much will go into your decision to begin collecting your monthly benefit. It goes without saying that we are happy to lay out various strategies to best position you when the time comes.
- Implementing the correct distribution strategy. If all your retirement assets are locked up in a Roth IRA, taxes are much less an issue when you withdraw for living expenses. However, many of us have our savings in a traditional IRA or 401k. Distributions will be taxed at your marginal tax rate. You may also be liable for penalties if you withdraw before the age of 59 ½.
Watch out for the required minimum distribution, or RMD, for your IRA, which now begins at 72 (70½ if you turned 70½ before Jan 2020). You may decide to leave your IRA alone until RMDs are required.
Some may choose to take withdrawals before 72 to reduce future RMDs and the potential tax implications of large withdrawals when they become mandatory.
Let me add that these ideas are general in nature. It’s a complex topic that could be explored in depth. My goal is to make you aware of the concept. There are ways to maximize your benefits and minimize costs. We tailor our recommended strategies to your specific needs.
- Spending too much or spending too little. When you retire, your lifestyle will change. You’ll have the opportunity to enjoy new experiences and enjoy them on your terms.
But let me gently caution you not to overspend in the early years of retirement. Recognize that you’ll be living on a fixed income, and you have a finite ability to earn extra cash. This is especially true as you get older.
At the same time, some retirees can be too cautious about spending. They have ample reserves but sometimes guard them too closely. We applaud those who want to leave a financial legacy to their children but balance that desire and have some fun in retirement.
- Be aware of scams. I won’t spend much time on this as I’ve written about fraud in the past and will gladly provide you with more information if you would like.
But be very cautious of individuals and companies that prey on the elderly and their desire to grow their savings. We are always happy to provide you with an objective review of any investments you are presented with. Remember, if it looks too good to be true, it usually is.
- Watch out for medical expenses. You have Medicare, and you probably have a supplemental policy. But deductibles and health expenses that are not covered by insurance are always a challenge.
It’s essential to budget for insurance and medical expenses that will likely occur as you get older.
- You may live longer than you expect. Don’t let your retirement plan’s success be predicated upon saying goodbye to your loved ones shortly after leaving the workforce. Life expectancy and longevity can only be estimated.
Some folks will live well into their 80s and 90s. Continue to plan as if you’ll be tapping your savings long after you have retired.
Lastly, stay active and volunteer. It will help keep you physically fit and mentally sharp. Just as we have a plan for your finances, it’s critical to have a plan that keeps you active and helps you enjoy retirement.
I trust you’ve found this review to be educational and informative.
Let me once again emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to reach out.
As always, I’m honored and humbled that you have allowed me to serve as your financial advisor. Please don’t keep me a secret.