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All Contents © 2019The Kiplinger Washington Editors
By Bob Niedt, Online Editor
| June 19, 2018
As more and more baby boomers start eyeing retirement, thoughts turn from worry over the workday commute to concerns about how to fund the golden years.
How prepared are you? How much money do you really need to retire? Do you know the ins and outs of your pension (if you're lucky enough to have one)? How about your 401(k), IRA and other retirement accounts that make up your nest egg? Do you have a good handle on when to claim Social Security benefits? These are some of the questions to contemplate as retirement approaches. But long before you punch out, make sure you are making the right choices.
We've compiled a list of the biggest retirement planning mistakes and how to avoid making them. Take a look to see if any sound familiar.
The lure of warmer climates has long been the siren call of many who are approaching retirement. So you're cooking up a plan to head south to Florida or one of the many other great places to retire if you hate the cold. Our advice: Test the waters before you make a permanent move.
Too many folks have trudged off willy-nilly to what they thought was a dream destination only to find that it's more akin to a nightmare. The pace of life is too slow, everyone is a stranger, and endless rounds of golf and walks on the beach grow tiresome. Well before your retirement date, spend extended vacation time in your anointed destination to get a feel for the people and lifestyle. This is especially true if you're thinking about retiring overseas, where new languages, laws and customs can overwhelm even the hardiest retirees.
Once you do make the plunge, consider renting before buying. A couple I know circled Savannah, Ga., for their retirement nest. But wisely, as it turned out, they decided to lease an apartment downtown for a year before building or buying a new home in the suburbs. Turns out the Deep South didn't suit their Northern Virginia get-it-done-now temperament. They are instead thinking of joining the ranks of "halfback retirees" – people who head south, find they don't like it, and move halfway back toward their former home up north.
Hard work, careful planning and decades' worth of wealth-building are the foundations of financial security in retirement. There are no short cuts. Yet, Americans lose hundreds of millions of dollars a year to get-rich-quick and other scams, according to the FTC. Of the more than 3 million complaints received in 2016, 37% were filed by people ages 60 and over. Fraud victims reported paying $744 million to scammers. My parents, both in their mid-80s and of sound mind, constantly receive calls on their land line from scammers trying to make them part with their hard-earned retirement dollars.
States' Attorney General offices and the FTC offer tips for spotting too-good-to-be-true offers. Tell-tale signs include guarantees of spectacular profits in a short time frame without risk; requests to wire money or pay a fee before you can receive a prize; or unnecessary demands to provide bank account and credit card numbers, Social Security numbers or other sensitive financial information. Also be wary of — in fact, run away from — anyone pressuring you to make an immediate decision or discouraging you from getting advice from an impartial third party.
What do you do if you suspect a scam? The FTC advises running the company or product name, along with "review," "complaint" or "scam," through Google or another search engine. You can also check with your local consumer protection office or your state attorney general to see if it has fielded any complaints. If it has, add yours to the list. Be sure to file a complaint with the FTC, too.
Many baby boomers like me have every intention of staying on the job beyond age 65, either because we want to, we have to, or we desire to maximize our Social Security checks. But that plan could backfire.
Consider this: 53% of workers expect to work beyond age 65 to make ends meet, according to the Transamerica Center for Retirement Studies. Yet, you can't count on being able to bring in a paycheck if you need it. While more than half of today's workers plan to continue working in retirement, just 1 in 5 Americans age 65 and over are actually employed, according to U.S. Department of Labor statistics.
You could be forced to stop working and retire early for any number of reasons, according to the Transamerica Center for Retirement Studies. Health-related issues — either your own or those of a loved one — are a major factor. So, too, are employer-related issues such as downsizing, layoffs and buyouts. Failing to keep skills up to date is another reason older workers can struggle to get hired. The actionable advice: Assume the worst, and save early and often. Only 28% of baby boomers surveyed by Transamerica have a backup plan to replace retirement income if unable to continue working.
The single biggest financial regret of Americans surveyed by Bankrate was waiting too long to start saving for retirement. Not surprisingly, respondents 50 and older expressed this regret at a much higher rate than younger respondents.
"Many people do not start to aggressively save for retirement until they reach their 40s or 50s," says Ajay Kaisth, a certified financial planner with KAI Advisors in Princeton Junction, N.J. "The good news for these investors is that they may still have enough time to change their savings behavior and achieve their goals, but they will need to take action quickly and be extremely disciplined about their savings."
Here's how much you need to sock away monthly to build a $1 million nest egg by age 65, based on Morningstar calculations. Assuming a 7% annual rate of return, you'd need to save $381 a month if you start at age 25; $820 monthly, starting at 35; $1,920, starting at 45; and $5,778, starting at 55.
Uncle Sam offers incentives to procrastinators. Once you turn 50, you can start making catch-up contributions to your retirement accounts. In 2018, that means older savers can contribute an extra $6,000 to a 401(k) on top of the standard $18,500. The catch-up amount for IRAs is $1,000 on top of the standard $5,500.
You're entitled to start taking retirement benefits at 62, but you might want to wait if you can afford it. Most financial planners recommend holding off at least until your full retirement age — 67 for anyone born after 1959 — before tapping Social Security. Waiting until 70 can be even better.
Let's say your full retirement age, the point at which you would receive 100% of your benefit amount, is 67. If you claim Social Security at 62, your monthly check will be reduced by 30% for the rest of your life. But if you hold off, you'll get an 8% boost in benefits each year between ages 67 and 70 thanks to delayed retirement credits. There are no additional retirement credits after you turn 70. Claiming strategies can differ for couples, widows and divorced spouses, so weigh your options and consult a professional if you need help.
"If you can live off your portfolio for a few years to delay claiming, do so," says Natalie Colley, a financial analyst at Francis Financial in New York City. "Where else will you get guaranteed returns of 8% from the market?" Alternatively, stay on the job longer, if feasible, or start a side gig to help bridge the financial gap. There are plenty of interesting ways to earn extra cash these days.
Taking a loan from your 401(k) retirement-savings account can be tempting. After all, it's your money. As long as your plan sponsor permits borrowing, you'll usually have five years to pay it back with interest.
But short of an emergency, tapping your 401(k) is a bad idea. According to Meghan Murphy, vice president of thought leadership at Fidelity Investments, you're likely to reduce or suspend new contributions during the period you're repaying the loan. That means you're short-changing your retirement account for months or even years and sacrificing employer matches. You're also missing out on the investment growth from the missed contributions and the cash that was borrowed.
Keep in mind, too, that you'll be paying the interest on that 401(k) loan with after-tax dollars — then paying taxes on those funds again when retirement rolls around. And if you leave your job, the loan usually must be paid back win as little as 30 days. Otherwise, it's considered a distribution and taxed as income.
Before borrowing from a 401(k), explore other loan options. College tuition, for instance, can be covered with student loans and PLUS loans for parents. Major home repairs can be financed with a home equity line of credit.
My parents are in their mid-80s and have been living in the same house for decades. In recent years they have started getting rid of all the bric-a-brac they've accumulated. Their goal is either to sell and move into a retirement community or, at the least, make it easier for my brother and I down the road when we inherit the home.
There hasn't been much junk among the items they've parted with save for the wall clock they gave me and swore it worked (it doesn't). But there were also items my father wisely ran past his lawyer before dumping: Bookkeeping records from the business he owned for years. He was cleared.
Still, that's fair warning: Be careful about what you throw out in haste. Sentimental value aside, certain professionals including doctors, dentists, lawyers and accountants can be required by law to retain records for years after retirement. As for tax records, the IRS generally has three years to initiate an audit, but you might want to hold on to certain records including your actual returns indefinitely. Same goes for records related to the purchase and capital improvement of your home; purchases of stocks and funds in taxable investment accounts; and contributions to retirement accounts (in particular nondeductible IRA contributions reported on IRS Form 8606). All can be used to determine the correct tax basis on assets to avoid paying more in taxes than you owe.
Sure, you want your children to have the best — best education, best wedding, best everything. And if you can afford it, by all means open your wallet. But footing the bill for private tuition and lavish nuptials at the expense of your own retirement savings could come back to haunt all of you.
"You cannot borrow for your retirement living," says Joe Ready, director of Wells Fargo Institutional Retirement and Trust. "[But] you may have other avenues beyond [borrowing from] your 401(k) plan to help fund a child's education." Instead, Ready says parents and their kids should explore scholarships, grants, student loans and less expensive in-state schools in lieu of raiding the retirement nest egg. Another money-saving recommendation: community college for two years followed by a transfer to a four-year college. (There are many smart ways to save on weddings, too.)
No one plans to go broke in retirement, but it can happen for many reasons. One of the biggest reasons, of course, is not saving enough to begin with. If you're not prudent now, you might end up being the one moving into your kid's basement later.
It's easy to see the appeal of a time-share during retirement. Now that you're free from the 9-to-5 grind, you can visit a favorite vacation spot more frequently. And if you get bored, simply swap for slots at other destinations within the time-share network. Great deal, right? Not always.
Buyers who don't grasp the full financial implications of a time-share can quickly come to regret the purchase. In addition to thousands paid upfront, maintenance fees average upward of $660 a year, and special assessments can be levied for major renovations. There are also travel costs, which run high to vacation hotspots such as Hawaii, Mexico or the Bahamas.
And good luck if you develop buyer's remorse. The real estate market is flush with used time-shares, which means you probably won't get the price you want for yours — if you can sell it at all, according to Ron Kelemen, a retired Salem, Ore.-based financial planner. Even if you do find a potential buyer, beware: The time-share market is rife with scammers.
Experts advise owners first to contact their time-share management company about resale options. If that leads nowhere, list your time-share for sale or rent on established websites such as redweek.com and tug2.net. Alternatively, hire a reputable broker. The Licensed Timeshare Resale Brokers Association has an online directory of its members. If all else fails look into donating your time-share to charity for the tax write-off.
Shying away from stocks because they seem too risky is one of the biggest mistakes investors can make when saving for retirement. True, the market has plenty of ups and downs, but since 1926 stocks have returned an average of about 10% a year. Bonds, CDs, bank accounts and mattresses don't come close.
"Conventional wisdom may indicate the stock market is 'risky' and therefore should be avoided if your goal is to keep your money safe," says Elizabeth Muldowney, a financial adviser with Savant Capital Management in Rockford, Ill. "However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation."
We favor low-cost mutual funds and exchange-traded funds because they offer an affordable way to own a piece of hundreds or even thousands of companies without having to buy individual stocks. And don't even think about retiring your stock portfolio once you reach retirement age, says Murphy, of Fidelity Investments. Nest eggs need to keep growing to finance a retirement that might last 30 years. You do, however, need to ratchet down risk as you age by gradually reducing your exposure to stocks.
We all want to believe we'll stay healthy and motoring long into our retirement years. A good diet, plenty of exercise and regular medical check-ups help. But even the hardiest of retirees can fall ill, and absent a serious illness time will take its inevitable toll on mind and body as you progress through your 70s, 80s and 90s.
When the day arrives that you or a loved one does require long-term care, be prepared for sticker shock. A 2017 Genworth survey found that the national median cost of assisted living is $45,000 a year; a private room in a nursing home, $97,455 a year. Even a sizable retirement nest egg can be wiped out in a hurry. And remember, Medicare doesn't cover most of the costs associated with long-term care.
There are options for funding long-term care, but they're pricey. If you can afford the high premiums, consider long-term care insurance, which covers some but not necessarily all nursing home costs. A typical policy for a 55-year-old male might start at $2,000 a year, according to Genworth. The annual premium jumps to $3,000 if the man waits until 65 to buy a policy. You can also look into purchasing a qualified longevity annuity contract,
known as a QLAC. In exchange for investing a hefty lump sum up front when you're younger, the QLAC will pay out a steady stream of income for the rest of your life once you hit a certain age, typically 85.
Estate planning isn't just for the wealthy. Even if your assets are modest — perhaps just a car, a home and a bank account — you want to have a valid will to specify who gets what and who will be in charge of dispersing your money and possessions (a.k.a. the executor). Die without a will and your estate is subject to your state's probate laws. Not only could your assets get tied up in court, possibly creating financial hardship for your heirs, but absent a will a judge might ultimately award your assets to an unintended party such as an estranged spouse or a relative you never liked.
Retirement is an ideal time to review existing estate-planning documents and create the ones you've long ignored. Start with the aforementioned will. You might have had one drawn up years ago when your kids were young. Decades later, what's changed? Are you divorced? Remarried? Richer? Poorer? Maybe you prefer for your grandkids or a favorite charity to inherit what you originally earmarked for your now-grown children? Remember, too, that some assets, such as retirement accounts, fall outside your will. Be sure the beneficiaries you have on file with financial institutions are up to date.
A will is just the start. You should also draft a durable power of attorney that names someone to manage your financial affairs if you need help or become incapacitated. And your health-care wishes should come into sharper focus now that you're older. Advance directives such as a living will, which spells out the treatments you do and don't want if you become seriously ill, and a power of attorney for health care, which names someone to make medical decisions for you if you can't make them yourself, are essential.
It's tempting for retirees who are house rich but cash poor to tap the equity that's built up in a home. This is especially true if the mortgage is paid off and the property has appreciated substantially in value. But tempting as it might be, think hard before taking on more debt and monthly payments at precisely the time when you've stopped working and your income is fixed.
Rather than borrow against the value of your home, explore ways to lower your housing costs. Start with downsizing. Sell your current home, buy a smaller place in the same area, and put your profits toward living expenses. For the ultimate in downsizing, consider a tiny home for retirement — seriously. Tiny homes are inexpensive, upkeep is easy, and utility bills are low. If you're willing to relocate, sell and move to a cheaper city that's well-suited for retirees. Or, stay put and find a roommate. The rental income will supplement your Social Security and savings.
If you must tap your home equity, tread carefully. If you still have a mortgage, look into a cashout refi. Just try to keep the length of the refinanced mortgage to a minimum to avoid making repayments deep into retirement. Otherwise, investigate a home equity loan or home equity line of credit (HELOC). However, be forewarned that under the new tax law you won't be able to deduct the interest on these loans unless the money is used to substantially improve your home, such as replacing the roof. In the past the interest could be deducted even if you spent the money on, say, a vacation or a new car. Yet another option for retirees is a reverse mortgage. You'll receive a lump sum of money or access to a line of credit that in most cases doesn't need to be repaid until you or your heirs sell the home.
A friend of mine had a nice government job. One of the perks was early retirement. He went for it. But not long after, he informed me he was going back to his old position, albeit two days a week. "There's only so many movies to see alone during the day in an empty theater," he said. "That got old fast."
Our careers provide structure to our lives five days a week, and weekends can be consumed by chores and rest. The cycle starts all over again Monday morning. But once you leave your job for good, there's suddenly a lot of time to fill. Have you truly thought through how you will fill it in retirement?
It's critical to plan your free time in retirement as thoroughly as you plan your finances. How about a part-time job doing something you love? My happy place the summer between high school and college was working at a theme park in New Jersey. No one was unhappy there. I've always kept "theme park job in retirement" in my back pocket. You could also take a casual hobby to new levels now that you have the time to devote to it. Or, you could return to school. Many public colleges and universities (and some private ones) offer free or reduced tuition to residents of a certain age, often starting at 60. Check a school's website for details, or call the registrar's office.