The Four Biggest Mistakes a Retiree Can Make

Mistake #1

Trusting the Market

Everyone knows that markets are volatile. The history of the stock market shows us that bear markets happen fairly frequently and unexpectedly. So-called experts and analysts study market trends constantly and make predictions on what the market is about to do. As savvy as they can be, one thing we know is they can be wrong, at great cost to the investors. Recessions and Black Swan events can cause ripple effects that can take years to recover from.

This is why smart planning tries to take advantage of the upside of the market while protecting your money from downside impact as much as possible.

Downside impact doesn’t always have a permanently damaging effect on your finances if you are young and can wait for the market rebound. However, if you are closer to retirement or already there, a market rebound could damage your retirement savings irreparably. Consider this: what if you had retired in 2007 and were heavily invested in large-cap stocks? Well, shortly after that the S&P 500 saw a 57% drop which would have made a $1 million dollar fund shrink down to a measly $430,000.[i] Can you afford that kind of loss?

Mistake #2
Failing to Prepare for Healthcare Costs

No one wants to consider a future where your health is sub-optimal. If you’re in good health right now it can be even harder to imagine. However, health care costs can be astronomical if you end up paying out of pocket. Sadly, that is exactly what happens to so many retirees. According to Fidelity, a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement. [ii]

The problems arise when you fail to prepare and plan for these costs. You would never buy a house and fail to get a policy on it, and you would never drive a car without car insurance. Similarly, pre-retirees need to plan for the possibility of healthcare needs. Medicare will cover a portion of the healthcare needs, but it will not cover all of it. For instance, medications are not covered unless you obtain a part D plan. [iii] Furthermore, the only Medicare plans that cover dental or vision care are Medicare Advantage plans. [iv]

One option to consider is to obtain a Health Saving Account (HSA). These accounts are available to those who have a High Deductible Health Plan (HDSP) and they’re used to cover medical expenses that go above what’s funded in the HDSP. The benefit of an HSA is that it just so happens to be a tax-advantaged account. The contributions are deductible, the growth is tax-deferred, and the withdrawals are tax-free (for qualified medical expenses). [v] Lastly, you can use money saved within a Health Savings Account to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums. [vi]

Mistake #3
No Plan for Taxes

Taxes are a part of life that we simply cannot avoid. But that doesn’t mean ALL taxes are unavoidable. So many retirees simply throw up their hands and assume that taxes can’t be changed. Not so.

We know that each retirement account has a different tax character. “Tax character” refers to the type, timing, and amount of taxes money in that account is subject to. For instance, you may need to pay tax on the “seed” money you put into a ROTH IRA, but you will never pay tax on the “harvest” if you draw income out at the right time and in the right way.

Furthermore, many retirees do not understand how quickly the tax bill adds up month and month, year after year when they start withdrawing their long-saved money. For many, they enter retirement with hopeful postures, looking forward to receiving their “pay check” as well as their “play checks.” [vii] The disappointment often comes when the same hopeful retiree looks despondently at their oversized tax bill steadily shrinking those coveted “play checks.”

The primary way tax-advantaged retirement planning helps is by moving funds from accounts that are “always taxed” to accounts that are “never taxed.” This is all about strategic placement of funds. By allocating your funds properly, you can potentially reduce your income tax liability, decrease capital gains tax, and lower your estate taxes. These strategies are used primarily by the wealthy in this country because they typically have access to the highest quality advisors money can buy.

Mistake #4
Working with the Wrong Advisor

When you have a basic advisor whose job is to keep you afloat and provide you with decent ideas for money management, you end up with basic results. When you have an advisor who specializes in the retirement years, you end up with results more tailored to your specific needs in this stage of life.

In fact, optimal retirement planning is a highly specialized skill set. Navigating the retirement years is not something all financial advisors are trained equally for. You need someone who lives and breathes retirement planning, who knows how to avoid excessive taxation, limit market risk, and guarantee you lifetime income so you end up with a worry-free retirement.