How To Prepare for A Successful Retirement Part 3: Common Mistakes & Miscellaneous Details
This blog post will be the final part of my series on preparing for a successful retirement. I want to focus on common mistakes that I see people make, whether they are in their working years or retirement years. So far, I have covered how to plan for retirement income needs and how to minimize taxes. While these are very important factors, we can’t forget about the small planning decisions we make throughout our lives.
Common Mistake #1 – Claiming Social Security too early
The earliest you can file for Social Security is 62, and the latest is 70. For anyone born after 1959, your full retirement age is 67. The full retirement age is when you can receive all the Social Security benefits you’ve earned based on your work history.
If your full retirement age is 67, and you claim Social Security at 62, then your monthly checks will be reduced by 30% for the rest of your life. However, if you wait until 70 to claim Social Security, your benefits will increase by 8% each year from 67 to 70. It may make sense to stay if you’re in good health and have a family history of longevity.
As life expectancy increases, so will the time you expect to retire. You should also have other sources of income in retirement, which should bridge the gap until you claim Social Security. However, there are circumstances where it might make more sense to claim benefits early. Your job may be physically taxing, you may be struggling with your health, or you may not be able to work anymore. Under these circumstances, receiving benefits early may be more of a necessity, especially if other income sources are limited.
Common Mistake #2 – Underestimating Medical Expenses in Retirement
Healthcare costs should be a significant consideration when planning for retirement. Medicare kicks in at age 65 and covers many expenses for retirees, but it doesn’t cover everything. You may need to purchase a supplemental insurance plan; there will be some out-of-pocket expenses and potentially long-term care costs.
In 2024, Genworth (a long-term care provider) conducted a survey on long-term care costs across 383 cities in all 50 states. They concluded that the annual median cost of an assisted living community in Ohio was $66,000, up 4% since 2023. The annual median cost for a semi-private room in a nursing home in Ohio was $108,405, up 8% since 2023.
If you consistently invested and saved in retirement accounts during your working years, it’s very possible your portfolio balance could cover these expensive costs. Contributing to a Health Savings Account (HSA) during your working years can help fund these later-in-life health costs. As long as withdrawals from an HSA are used for qualified medical expenses, the withdrawal is tax-free. Another option is getting a long-term care policy while still working. These policies are significant if you purchase them while still working because the premiums will be much cheaper. As you get older and health risk increases, the premiums can become pretty expensive. So, I wouldn’t recommend this option if you were to start this policy later in life.
Common Mistake #3 – Borrowing from your 401(k)
While working, you may encounter financial hardships, and borrowing from your 401(k) may not sound like a bad idea. However, taking a 401(k) loan really shortchanges your retirement account because you reduce or suspend contributions while you pay back the loan. You also miss out on any investment growth from those missed contributions.
Another huge downside is that 401(k) loans usually must be paid back within 5 years. If you leave your employer during this period, you are typically obligated to pay it back in full within a specific time frame, or it becomes a taxable distribution. If you are under age 59 ½ and this happens, you incur an additional 10% penalty on top of paying taxes on your unpaid loan.
Common Mistake #4 – Avoiding the stock market / Investing too conservatively
Since 1926, stocks have returned an average of about 10% per year. While the stock market is risky, you are not necessarily keeping your money safe if you use bank accounts, bonds, and CDs to hold your cash. When we invest in the stock market, the risk is the possibility of volatility, while the reward is the potential to earn a high return. Utilizing only conservative investments may protect your principal investment, but this comes at the expense of low returns.
You have not necessarily eliminated your risk by avoiding the stock market, but you have shifted your risk to the possibility of your money not keeping up with inflation. You do need to lower risk as you age by reducing your stock exposure. However, there needs to be a balance between principal preservation and portfolio growth because the goal is for your money to last the rest of your lifetime.
This information was helpful and got you thinking about how these planning areas may affect your own financial situation. While these mistakes may seem very basic, these are areas that most people will experience and have to think about at some point in their lives. If you ever find yourself in one of these circumstances, at least you will be familiar with the pros and cons of the differing outcomes. If you need assistance with strategy planning for retirement, I recommend you contact and work with a financial advisor.