Five mistakes to avoid in retirement
Paul Litchfield is senior vice president at Claro Advisors in Worcester. Reach him at Plitchfield@claroadvisors.com and 617-863-2147.
From taking too much risk to increased spending, retirees have a lot to think about when beginning the next chapter.
You've spent a lifetime working hard and saving so you can retire and enjoy the fruits of your labor. Hopefully you'll have created a comprehensive retirement plan long before that day comes. However, retirement planning doesn't stop once you retire. Here are five common mistakes to avoid.
1. Failing to take a more conservative approach to investing.
Many folks who enter retirement fail to adjust their thinking on risk and how it relates to their investment portfolio. Understandable given the fact that people spend most of their lives in two stages of the financial life cycle: first, the asset accumulation phase (age 25-45); and second, and the pre-retirement phase (age 45-65). These first two phases typically coincide with a higher risk tolerance and therefore a more aggressive investment approach. However, once you enter the third and final phase of the financial life cycle, the retirement phase, it's important to set new parameters and ensure your portfolio is aligned with your overall objectives.
2. Spending like you used to and disregarding the budget.
During the pre-retirement years, people who work have a budget and cash-flow plan. However, because of family dynamics, increased cost of living, and other factors, these same folks usually exceed those plans by overspending. That may be okay because they can reimburse those expenses by bringing in more income. But the game changes in retirement. You're no longer deriving compensation, making it extremely important to stick to your budget. And this may be even more difficult for retirees as, with more time on your hands, it can be easier to overspend on travel, dining and spoiling the younger generations. But compounded with inflation, this can be a disastrous mix.
3. Taking social security benefits at the wrong time.
One of the most common questions for people in retirement is when to start taking social security. For years it was thought retirement began once you turned 65 years old, but that number has changed. For people born after 1954, the retirement age has been bumped up to age 66, and the earliest you can claim social security is at age 62 regardless of your full retirement age. The bottom line is the younger you are today, the greater the penalty for taking benefits early.
4. Not planning properly for the cost of health care.
People either have no idea what their healthcare costs will be or dramatically underestimate those costs in retirement. Those that understand this piece of the puzzle most likely had an experience with a parent or other elder person that they cared for – and it was probably expensive. From medications to nursing homes these costs continue to climb each year. A couple who retired in 2017 can expect to spend about $275,000 on healthcare costs in retirement.
5. Creating issues for the next generation.
One of the most procrastinated topics for retirees is generational planning and wealth-transfer strategies. Nobody likes talking about death. However, it's one of the most important topics to discuss. Families can be torn apart by conflict after a patriarch or matriarch passes on. Funeral costs, estate taxes and fighting over inheritances are among the burdens left for your loved ones if you don't leave them with a well-designed plan.
If you don't want to create issues for the next generation, establish a plan. Decide what you want to happen with your estate now so that your loved ones aren't burdened with trying to figure things out after it's too late. The earlier you start thinking about it, the better.
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