Retirement is an exciting phase of life that allows you to enjoy the fruits of your labor and pursue your passions. However, your retirement dreams can quickly become nightmares without proper planning.
Retirement planning involves setting goals, managing investments, minimizing tax obligations, and preparing for unexpected expenses. For those nearing their retirement date, these considerations become even more critical. In this blog, we have gathered some tips to help you secure your retirement. Here's what you need to know.
Mistake 1: Neglecting to Set Clear Goals
One of the most common mistakes retirees make is failing to establish clear and achievable retirement goals. Setting clear goals helps you prioritize your financial objectives and align your resources accordingly. With defined plans, making informed financial decisions and creating a realistic roadmap for your retirement becomes easier.
Start by visualizing your ideal retirement lifestyle. Consider the activities you want to engage in, the places you want to visit, and the experiences you wish to have. Consider whether you want to maintain your standard of living or downsize to a more modest lifestyle. Reflect on personal and philanthropic goals, such as leaving a legacy for your loved ones or contributing to an important cause. Break your goals down into specific, measurable objectives.
Mistake 2: Applying For Social Security Too Early
Delaying Social Security benefits until your full retirement age (FRA) or beyond can have significant financial advantages. While you can apply for benefits at age 62, the amount you receive will be reduced by up to 30% compared to what you would receive at FRA, as determined by the Social Security Administration.
It's important to note that choosing to receive benefits before your FRA while continuing to work can further decrease your benefits. For every $2 you earn above a specific threshold of $21,240 in 2023, you will lose $1 in benefits. Unless you urgently need the money, it's advisable to consider waiting to apply for benefits.
If you are financially able to delay applying for benefits until age 70, it can be even more advantageous. Your benefit will be approximately 32% higher at this age than your FRA. This increase can significantly impact your retirement income and provide greater financial security in the later years of your retirement.
By waiting to apply for Social Security benefits, you can maximize your monthly benefit amount and improve your retirement financial situation. However, the decision should be based on your circumstances and financial needs. Consulting with a retirement income planner can help determine the optimal timing for claiming Social Security benefits.
Mistake 3: Underestimating Healthcare Expenses
Underestimating healthcare expenses during retirement can significantly strain your finances, particularly as you age. Rising medical inflation, potential long-term care needs, and the cost of Medicare supplement plans should be considered. Healthcare costs tend to increase over time, often exceeding general inflation rates.
Evaluating the costs associated with long-term care insurance or alternative strategies is crucial. According to the Employee Benefit Research Institute, to have a 90 percent chance of meeting their healthcare spending needs in retirement, a man must save $166,000, and a woman must save $197,000. Couples enrolled in a Medigap plan with average premiums will need to save $212,000 to have a 50 percent chance of covering their medical expenditures in retirement and $318,000 to have a 90 percent chance. Failing to factor in this rising trend can lead to unexpected financial burdens.
Medicare, while providing some coverage, doesn't cover all expenses. Medicare premiums, deductibles, copayments, and prescription drugs can accumulate. In 2023 without insurance, monthly long-term care costs could see you paying:
- $5,148 for a home health aide
- $1,690 for adult daycare
- $4,500 for assisted living
- $7,908 for a semi-private room in a nursing home
- $9,034 for a private room in a nursing home
Individuals 65 or older have a 70 percent chance of needing long-term care services in the future, but only 11 percent purchase long-term care insurance. The rest are left scrambling to cover costs when the time comes.
Seeking guidance from a financial advisor with knowledge in insurance planning can help develop a comprehensive strategy incorporating healthcare expenses into your retirement plan.
Mistake 4: Failing to Diversify Investments
As retirement approaches, the importance of diversification becomes even more significant. Diversification is a crucial strategy for effectively managing investment risk. By spreading your investments across different asset classes, you can even help mitigate the impact of market volatility.
That is why it is essential to diversify your investment portfolio by including a mix of stocks, bonds, real estate, and other suitable investment vehicles. By diversifying, you reduce the risk of relying too heavily on a particular sector or asset class, which can leave your portfolio vulnerable to market fluctuations.
Furthermore, as you begin withdrawing assets from your retirement nest egg, a strategy prioritizing capital preservation becomes crucial. This means considering investments that can help protect the value of your portfolio while still providing potential growth. Refrain from considering capital preservation in your investment strategy to avoid exposing your portfolio to the dangerous combination of spending needs and volatile markets, potentially causing long-term damage.
Working with a financial advisor knowledgeable in investment planning is advisable to ensure a well-structured and resilient investment portfolio. They can help you design a diversified investment strategy aligning with your goals, risk tolerance, and time horizon.
Mistake 5: Miscalculating RMDs
Once you reach a certain age, you are required to take annual distributions, known as required minimum distributions (RMDs), from your 401(k), Traditional IRA, Simplified Employee Pension (SEP), and SIMPLE IRAs. The SECURE 2.0 Act of 2022, signed into law on December 29, 2022, increases the age at which RMDs must commence from 72 to 73 in 2023 and 75 in 2033. This requirement applies even if you don't need the distributions, except for Roth IRAs. However, you may have flexibility in determining when to take the first-year distribution.
You can take the first-year distribution when you reach your RMD age or delay it until April 1st of the following year, known as the required beginning date. If you wait for the first distribution, you must take two distributions during that year—both the first-year's and the second-year's required distributions. It's important to note that RMDs are generally taxable at your individual tax rate, and failing to take them can result in penalty taxes.
The calculation of RMDs is based on IRS life expectancy tables. While you can access these tables online and calculate the distributions independently, it's always best practice to consult a trusted financial advisor.
Understanding the rules and requirements surrounding RMDs is crucial to ensure compliance and avoid unnecessary penalties. Consulting with a financial advisor or tax professional can provide personalized guidance tailored to your retirement accounts and circumstances.
Working With A Fiduciary Advisor
Working with a Fiduciary Advisor is paramount when planning for retirement and avoiding big mistakes. By partnering with a Fiduciary Advisor, you can streamline the retirement planning process. They will assist you in developing a comprehensive retirement income plan incorporating the essential factors:
At Agemy Financial Strategies, our Fiduciary advisors are dedicated to collaborating with you to devise the most effective strategies for minimizing taxes during retirement. We work diligently to create a reliable retirement income stream that can withstand market fluctuations, enabling you to enjoy your desired retirement lifestyle. With our expertise and personalized guidance, you can navigate the complexities of retirement income planning and feel confident in your financial future.
To Sum Up
To ensure a fulfilling retirement, it is crucial to understand the available options for protecting and growing your savings. Exploring these possibilities plays a vital role in securing an optimal retirement. Seeking guidance from a Financial Advisor can help initiate meaningful conversations and develop strategies tailored to your unique needs.
At Agemy Financial Strategies, our team of skilled financial advisors are ready to assist you at every stage of your retirement journey. We are here to provide the support and expertise you need to navigate the complexities of retirement planning and help you achieve your financial goals.