Cypress Wealth Services
Retirement is one of the biggest financial transitions you’ll make in life. You go from earning income and growing your nest egg to depending on your saved wealth and trying not to outlive it. And even though you’ve planned for years, entering retirement is not a time to set the autopilot. There are a few key decisions and actions that you still need to take care of to make sure things go as planned. Let’s take a look at 5 common mistakes retirees make and what you can do to avoid them.
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.
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? (*1)
According to the Employee Benefits Research Institute, the average couple at age 65 will experience anywhere from $183,000 to $363,000 in healthcare costs in retirement. (*2) And when it comes to healthcare, the real retirement enemy often comes in the form of long-term care costs. Since 70% of people will need some form of long-term care during their lifetimes, it’s critical to have a plan to pay for these costs. (*3) With average long-term care costs hovering around $280 per day or $8,517 per month for a private room in a nursing home, (*4) 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
While it’s recommended to invest less aggressively as you get older, be careful not to be too conservative. You don’t want inflation wiping out all your gains. You might think dumping your money in a “safe” money market account or short-term CD is a good idea, but when you play it too safe, your savings can’t keep up with inflation and you end up losing money down the line.
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.
Deciding when to start drawing from Social Security is one of the most important retirement decisions you’ll make. It shouldn’t be taken lightly. Obviously, everyone’s situation is different and there’s no one-size-fits-all answer. But in general, the longer you wait, the higher your monthly payments will be and the more security you’ll have. Those who wait until age 66 will receive about 25% more than those who begin drawing at 62. And if you can hold out until you’re 70 years old, your monthly payment will increase by another 32%. (*5)
With that in mind, another mistake is waiting too long. Depending on your circumstances, you might want (or need) to start drawing earlier. 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.
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.
It’s impossible to go through life without making mistakes, but at Cypress Wealth Services, we are uniquely qualified to help you manage your wealth and avoid these costly mistakes in retirement. We help with everything from making a realistic budget you can follow to creating a tax-efficient distribution plan that keeps more money in your pocket. To learn more about our services, contact one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert, CA, Tustin, CA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.