5 Major Retirement Mistakes And What To Do About Them
When your pet has an uh-oh, it’s relatively easy to clean up; money mistakes – not so much. Although one in four American workers have less than $1,000 saved according to the 2017 Employee Benefit Research Report, it’s what you do with the money once it’s saved that determines whether or not you’ll enjoy the kind of retirement that you deserve.
All kittens aside, saving money in many ways is the easy part. With the advent of automatic deposits and portfolio rebalancing, you can put the process on auto-pilot and watch the cashola pile up. But what about when you retire and start taking those dollars out? People tend to fall short when they make planning mistakes. We have the top 5 big ones listed here, as well as what you should do instead to prevent major upsets from spoiling your hopes and dreams.
MISTAKE #1: Withdrawing funds too early.
A 2016 survey conducted by the FINRA Investor Education Foundation found that one in ten working Americans has made early withdrawals from their retirement accounts. This can sock it to you in more ways than one.
First, you may be assessed the 10 percent early withdrawal penalty by the IRS if you are under the age of 59 ½. Second, the money you take out hasn’t been taxed yet, so you’ll have to add it to your income total for the year and pay your share of income tax on the amount of the withdrawal. Third, you might have to endure a six-month suspension from contributing to your account again if you’re receiving an employer match, and fourth, you give up the compounding interest on that money.
For someone earning $75,000 annually who is 15 years away from retirement, withdrawing $20,000 would cause them to lose $71,770 in future retirement benefits, and they would only net $13,000 of that withdrawal after taxes and penalties. A 30-year old who withdraws $20,000 would give up $129,068 over the next 32 years, even if he or she never contributed another dime.
What to do instead: Leave the money alone and consider taking out a loan on a cash value life insurance policy.
MISTAKE #2: Investing too conservatively.
After the market crash of 2008, a lot of investors made the rush to safety. Some people went to cash, other people put their money in bank CDs or bonds. There are inherent problems with putting too much money all of these options.
While it’s always good to have an emergency fund during retirement, you don’t want to have too much lazy money sitting around doing nothing. The rates on bank CDs haven’t been earning enough to keep up with inflation, and because they don’t grow tax-deferred, you may even end up with a net loss, all things considered. As interest rates begin their rise, bonds have also become a losing investment, so much so that experts are calling the current climate a bear market for bonds.
What to do instead: Consider a fixed or indexed annuity. They offer similar terms to bank CDs but with much more attractive rates. To shop around and compare rates, view our extensive database of annuity reviews, or reach out to one of your experts by asking your question here.
MISTAKE #3: Paying too much in fees.
In a study conducted by AARP, 71 percent of participants reported that they did not pay out any fees to their 401(k) plan, and 100 percent of them were wrong. The expense ratios for the average 401(k) range anywhere from .28 percent all the way up to 1.38 percent per $1,000 invested. According to the Center for American Progress, plans with fewer than 100 participants have an average expense ratio of 1.32 percent.
What to do instead: Don’t keep your head in the sand. Find out if the hidden fees in your 401(k) plan are killing your retirement. If you are 10 or fewer years away from retiring, it might be in your best interest to move some of the money out of your 401(k) and into a more cost-effective investment. For advice, GO HERE.
MISTAKE #4: Not coordinating benefits.
In 2013, Head of Retirement Research at Morningstar Investment Management David Blanchett, together with Paul Kaplan, Director of Research, joint-authored a paper that looked at the financial benefits achieved by more intelligent financial decisions. What they found is that coordinating your money decisions to include factors such as taxes, a dynamic withdrawal strategy, and guaranteed income products such as annuities, retirees can achieve 22.6 percent greater portfolio efficiency.
Imagine extending the value of your current portfolio by 22.6 percent, not because you were adding more money to it or earning higher returns, but simply because you were making better decisions with that money. On a $750,000 portfolio, that would amount to another $169,500.
MISTAKE #5: Failing to consider your spouse.
The definition of “impoverished” according to the federal poverty level is just under $12,000 for a single individual, and guess what? Usually, that individual is female. According to a 2016 study conducted by the National Institute on Retirement Security, women are 80 percent more likely than men to be impoverished at age 65 and older, while women between the ages of 75 to 79 are three times more likely than men to be living in poverty. Not good.
How does this happen? Women typically live longer than men, and it’s common for women to be several years younger than their spouse. Also, in many cases, it’s the men who have the pension or receive a larger Social Security benefit. When the husband dies, unless planning is done, the pension disappears and the household also loses a Social Security check.
What to do instead: Consider setting up a joint-life income rider on an annuity that will pay both you and your spouse an income for life. For other situations, it might be more advantageous to look into the benefits of life insurance to protect the surviving spouse. Many of today’s newer options can leverage your dollars—giving your spouse a greater income using the money you have to spend anyway, such as required minimum distributions on your IRA.
To find out more about coordinating your options, reach out to one of our qualified retirement advisors today.