Preparing for Retirement: 5 Big Mistakes and How to Correct Them
As you prepare for retirement, there’s a lot to consider: Your routine, daily commitments, and paycheck all will change. The old saying about retirement is “you get twice the spouse and half the income”.
We help a lot of folk plan and prepare for retirement. Here are a few common pitfalls to avoid, along with remedies:
Mistake #1: Not Setting Expectations
When you think of a Million-dollar 401(k) account, what lifestyle do you see?
Maybe it’s the vacation home, the travel, the golf memberships, dining out, new car, home upgrades.
If you plan to make that money last by spending 4% per year, you might want to temper expectations. That’s roughly $3,300 a month, before taxes.
Fix: Create a budget, and temper your lifestyle expectations. Otherwise, you risk being like the 1/3 Americans who go back to work after retiring.
Mistake #2: Not Having A Health Insurance Strategy
The average couple will need roughly $295,000 in retirement for healthcare costs alone (According to Fidelity Research). Retiring before age 65 (when Medicare is available) can mean spending down your assets on private insurance to bridge the gap. Several of our married clients pay over $1,500 a month after age 60 for private plans.
Fix: Before retiring, see a health insurance expert and explain your situation. Will COBRA coverage be less than a private plan? Can you extend your workplace coverage? Will you qualify for Covered California? Ultimately, a reduced role at work (rather than cold-turkey) may be worth it to continue health care benefits.
Mistake#3: Cashing Out Your 401k or IRA
You’ve saved and invested through your working years, and now you’ve got a pile of money to look forward to. However, if it’s in a 401(k) or IRA, sending it all to your bank account can be costly.
For starters, a 10% early withdrawal penalty can apply if you’re below certain ages.
Additionally, a full distribution is taxable, and graduated tax rates can add up quickly. According to SmartAsset Calculators, Someone living in California who withdraws a million dollars can expect to pay a combined 40% in total State and Federal income tax (leaving them with less than $600,000).
However, pulling $100,000 a year over time would cost less than 20% in income tax.
Fix: Within 60 days, you can redeposit the funds in your IRA as an “IRA rollover”. This will generate a form 5498 to offset the 1099 you’ll receive for the cashout, meaning taxes won’t be due until you pull the money out down the road.
Mistake #4: Invest In The First Thing You See
There are a tremendous amount of life questions you’ll have retiring, so it’s tempting to find a quick solution for the money aspect. Anywhere you look you can find no shortage of companies offering “guaranteed” products as a quick retirement solution.
Unfortunately, guarantees in an uncertain world are quite expensive. They often come with huge commissions and undisclosed ongoing costs. Several popular annuities, whole life insurance, and Real Estate trusts are hard to get your principal out of. Just like The Eagles’ “Hotel California”; easy to check-in, but “you can’t ever leave”.
Fix: Every company is different, but most insurance companies have a “free look” period of 10-30 days which allows you to back out for free. You’ll be best served to immediately have a second set of eyes on the contract, and call the issuing company directly for the terms of withdrawal.
Mistake #5: Immediately Claim Social Security
For most people, Social Security is the only guaranteed income they’ll have in retirement. Your retirement savings and personal investments all carry different types of risk. For this reason, your Social Security claiming strategy is highly important.
If you’ve reached FRA, “Full Retirement Age”, (which is 66-67 for most folks) you don’t have to worry about drawing it too early. However, if you start taking your social security before your FRA, it could be problematic.
For starters, claiming at age 62 means you lock in a monthly paycheck that’s 30% less than the one you’d have received at FRA. You’re stuck with that lower payment for the rest of your life.
Additionally, if you earn above a minimum income amount during the years before reaching FRA, your benefit can be reduced up to 50%. Ouch.
Fix: The SSA gives you a year to pay back those early benefits to let your benefit grow. To start the process, fill out the Social Security form SSA-521, and send the completed form to your local Social Security office.
As always, an ounce of prevention is worth a pound of cure. If you need help planning your retirement, we’re here to help, and never charge for a first meeting. Give us a call at 530-487-1777.