Heading into job sunset soon? Whether you’ve been planning your exit from the workforce for decades or decided on a whim that you’d be ready to rush toward the door the day you turn 60 (or will wait until you’re 67), you want to make sure you’re not making some common mistakes.
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Since the mid-1990s, the average retirement age has risen from 62 to 64 for men and from 60 to 62 for women, according to the Center for Retirement Research at Boston College. This later-retirement trend has occurred for various reasons, according to Center research. The trend of later retirements can be attributed to changing incentives in Social Security and employer pensions. In addition, better education and health, less strenuous jobs and the decline in retiree health insurance has also increased people’s retirement ages.
However, it’s possible to make a few mistakes on the eve of your retirement. Let’s explore some common ones.
Mistake 1: Thinking your investments must automatically become more conservative.
You may think you need to go all in on bonds or other fixed-income assets the minute you consider retirement, but that could be a mistake. At 60, you could still have a 30-year time horizon at your fingertips. Why not keep most of your money in stocks and allow it to work in your favor as a hedge against inflation?
In fact, consider dividend stocks for a great income-producer in retirement. Dividend stocks produce a dividend, which means that a company gives you money for your shares on, say, a quarterly or annual basis.
Dividend stocks can definitely help replace your income when you stop working. They also avoid volatility, unlike regular run-of-the-mill stocks because companies that pay dividends are usually established, financially secure companies.
Mistake 2: Not understanding RMDs.
Have you taken the time to understand the required minimum distributions (RMDs) for your various accounts? RMDs refer to the amount of money you must withdraw by a certain age.
You must start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs do not require withdrawals until after your death and they offer a great opportunity to leave money to your heirs
You can probably imagine what happens if you don’t withdraw the full amount of the RMD by the applicable deadline but the tax is a whopper. You’ll get slammed with a 50% tax hit.
By the way, you should also make sure you understand the SECURE Act rules mentioned on the IRS website. If you’ve contributed to a defined contribution plan or an individual retirement account (IRA), your heirs must distribute the entire balance of your account within 10 years, or face tax consequences.
Mistake 3: Not looking into long-term care insurance.
Yes, yes, this sounds like a real drag, doesn’t it? As a healthy individual, planning for a nursing home or assisted living can seem like a leech on the excitement you’ve built up about retirement. However, that’s precisely the time when you should look into it — when you’re healthy.
The monthly median costs of a semi-private room in a nursing home facility amount to a whopping $7,756 and $8,821 for a private room. Of course, that does depend on where you get care, the geographic location of the care you receive and the level of care you need, according to the Genworth Cost of Care Survey.
If you suddenly realize that you need long-term care insurance when you’re 80, you won’t be able to get it. You’re even better off getting it in your 50s. If it’s too late for you to find a policy, pass that wisdom on to your children.
Mistake 4: Saying out loud, “Social Security and health insurance will just ‘work themselves out.'”
Oh, no, no.
You want to know exactly how much you’ll bring in with Social Security. You can start to collect Social Security retirement benefits as early as age 62, but if you wait longer, you’ll get a larger check, particularly if you wait until your full retirement age. Waiting until age 70 to collect Social Security will give you the biggest monetary benefit.
You also want to know exactly what you’ll pay for health insurance, including premiums, deductibles, copays, and more. It’s not free, and when you live on a fixed income, insurance costs may make a bigger dent than you think. Learn the costs of Medicare. You may also need to tap into a supplemental insurance plan, so go through your options there as well.
Mistake 5: Not plumping up your emergency fund.
Think you’re satisfied with a packed-to-the-gills IRA or 401(k)? You still need an emergency fund for those “what-ifs.”
Have you ever heard of the 4% Rule? Experts recommend withdrawing no more than 4% from your retirement accounts, which suggests that it’s the safest amount you can withdraw and still have enough to last for the duration of your retirement. You’ll even have to withdraw more in subsequent years to keep up with inflation. That 4% isn’t going to cover everything, especially because you’re not going to withdraw your entire pot of gold right away.
You still need to have an emergency fund on standby for situations like having to tow your car to a junkyard (and therefore, needing a new one) or other types of situations that crop up.
Mistake 6: Not having a plan.
Gosh, you’ve planned your whole life to get to this point. It seems like such a bummer to have to diligently plan your retirement, too, right?
However, not having a plan can set you up for not having enough money in retirement, cause you to encounter a shortfall in your health care or more. It’s really important to make sure you’ll avoid running out of money in retirement.
Calculate the rate of return you need on your investments, how much risk you should take on and the amount of money you should withdraw from your portfolio.
Dot Your I’s and Cross Your T’s
It’s also important to remember that you can pivot at any time during retirement. You can pick up a side hustle if you feel you need more retirement income. You can reinvest your money to go toward dividend stocks. You can sell your house and downsize. However, going into your 60s, you should have a really clear idea of how you’ll handle all of the above factors.
Visit with a financial advisor for some great advice if you’re not sure you can confidently say you’re avoiding the common mistakes above.