By Tricia Lepofsky, ChFC®
Retirement is a time many of us look forward to—a chance to relax, pursue our passions, and enjoy the fruits of our labor. But the unfortunate truth is that there are many common mistakes retirees fall into that end up hindering their retirement dreams and putting their financial well-being at risk.
Because retirement is a journey that requires ongoing attention and decision-making, staying proactive and making informed choices helps you navigate the transition to this phase of life with confidence and ease. Today let’s delve into the most prevalent retirement mistakes and offer insights on how to sidestep them. From miscalculating taxes to early Social Security claims, we’ll explore the key missteps to watch out for to help you reach a financially sound future.
1. Overspending in Retirement
Do you know what you will do with your newfound freedom in retirement? Many people start by pursuing all the things they didn’t get to do while working—traveling the world, picking up a new hobby, remodeling their home, and the list goes on.
But many people underestimate the amount of money they’ll spend in those first few years of retirement. With so much extra time on your hands, it’s easy to make a lot of little purchases that add up to a lot over time.
If you want to avoid this mistake, create a detailed but realistic budget and stick to it. Yes, you can budget for extras such as a vacation or a new hobby, but make sure you know how it will affect your nest egg before you follow through with it. And be sure to work with your advisor to find a withdrawal rate that will stretch your money for as long as possible.
2. Underestimating Healthcare and Long-Term Care Costs
Retirees receive Medicare after age 65, but most of the time, this isn’t enough to cover chronic healthcare needs in retirement. For example, did you know dental, basic vision, over-the-counter medication, and long-term care are not covered by Medicare?
The average couple at age 65 will spend $315,000 after tax on medical expenses. What’s more, the real retirement enemy often comes in the form of long-term care costs. Nearly 70% of retirees will need some form of long-term care during their lifetimes, and with average long-term care costs hovering around $315 per day or $9,584 per month for a private room in a nursing home, it’s critical for you to have a plan in place to cover these expenses.
First, cautiously watch your spending in retirement to ensure there is a financial margin in place to protect you when larger medical bills hit later in life. And when choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. Finally, explore your long-term care coverage options, such as traditional long-term care insurance, life insurance with a long-term care rider, and annuities with long-term care riders. The earlier you get coverage, the better, since the older you get, the higher your cost for a long-term care insurance policy will be and the greater the likelihood of your application being denied.
3. Overreacting to Stock Market Volatility
Retirees usually want to play it safe in the stock market, by investing conservatively and safeguarding their nest egg as much as possible. But when you play it too safe, your savings can’t keep up with inflation and you end up losing money down the line. With inflation hitting a staggering 9.1% in 2022 and still hovering around 6% in February 2023, most retirees can’t afford to avoid the stock market volatility that comes with investing at least a portion of their savings in growth assets.
Since your retirement may last anywhere from 20 to 30 years—as much time as you’ve spent in the workforce—don’t get caught up in investing too conservatively just to avoid short-term volatility. When your portfolio is too conservative, inflation becomes the biggest threat to your assets.
4. Claiming Social Security Too Early
Don’t assume it’s best to start collecting Social Security at age 62 (or at full retirement age, for that matter). If your full retirement age is 66, for example, you could receive a 32% increase in monthly benefits by waiting to collect Social Security until age 70. This means if your standard benefit amount is $1,500 per month, you could receive $1,980 by waiting four more years. This equates to thousands of extra dollars over the course of your retirement.
When deciding when you should start collecting Social Security, consider the size of your nest egg, your retirement date, and the current state of your health. Calculating when to claim your benefits is both an art and a science. If you need help, reach out to a trusted financial advisor who can help you run the numbers.
5. Miscalculating Taxes on Retirement Income
Your retirement accounts are all taxed differently. If you don’t have a strategic withdrawal plan in place, you could end up with a large tax bill at the end of the year. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability.
Speak with a financial planner or tax advisor about creating a tax-efficient distribution strategy for retirement. This professional can look at your tax bracket, retirement accounts, and Social Security to help you withdraw money in the most tax-efficient way.
We Are Here to Help
Just because no one can completely avoid making any mistakes, don’t let that discourage you from planning ahead for a fulfilling retirement with as few obstacles as possible. Having a financial partner in your corner can help guide you with clarity. At KFA Private Wealth Group, we possess the experience and knowledge to assist you in effectively managing your wealth and steering clear of the all-too-common costly errors that often arise during retirement.
All great journeys begin with a single step. And as your trusted partner on this retirement journey, we will work together to develop a realistic budget and design a tax-efficient distribution plan that maximizes your savings. By doing so, we aim to keep more money in your pocket as you confidently pursue a comfortable and worry-free retirement.
Don’t let common pitfalls hinder your retirement dreams. Reach out to us today by emailing tricia@kfapwg.com or calling 571-327-2222 to schedule an appointment and learn more about how we can help you navigate the complexities of retirement planning. Together, we can build a solid foundation for a prosperous and enjoyable retirement.
About Tricia
Tricia Lepofsky, ChFC®, is a financial advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing sound financial and investment advice. With a background in music education and opera, Tricia transitioned to the financial industry to help people understand what their money can do and feel more in control as they work toward their goals. Tricia is known for her attention to detail and her dedication to her clients and their unique financial challenges. She is passionate about building relationships with her clients and partnering with them as they walk through life’s milestones, keeping them accountable and motivated to pursue their goals. While she serves a diverse range of clients, Tricia uses her background of 18 years in the Washington National Opera and Washington Concert Opera to specialize in serving hardworking, intelligent individuals who have a connection to the arts. In her spare time, Tricia loves to travel with her husband, Mark, hike trails along the Potomac River or in the Blue Ridge Mountains, and support former colleagues by attending live performances of operas and musicals. To learn more about Tricia, connect with her on LinkedIn.
