5 Common Retirement Mistakes and How to Avoid Them
Louis J. Butera, CFP® | September 02, 2022
It’s impossible to go through life without making mistakes—they’re just a part of being human. If we’re wise, we can learn from our mistakes and then make better decisions in the future. However, when it comes to retirement, there are no do-overs. In this major financial transition, you go from earning an income and growing your wealth to depending on it and trying not to outlive it. Retirement is not a time to go on autopilot. To make sure things go as planned, you must make a few key decisions and take a few key actions. Here are 5 common mistakes retirees make and what you can do to avoid them1.
Overspending in Retirement
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 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.
2. Overreacting to Stock Market Volatility
Retirees tend to want to play it safe in the stock market. They want to invest on the conservative side and protect their nest egg as much as possible. 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.
3. Claiming Social Security Too Early
Don’t assume it’s best to start collecting Social Security at age 62 (or at full retirement age, for that matter). If your full retirement age is 66, for example, you could receive a 32% increase in monthly benefits by waiting to collect Social Security until age 70.
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.
4. Miscalculating Taxes on Retirement Income
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.
5. Underestimating Healthcare Cost
American healthcare is more expensive than in any other developed country2. And as you age, you will likely require more healthcare services. According to Fidelity’s Annual Retiree Health Care Cost Estimate, couples who retire now will need $300,000 to pay for healthcare expenses that come their way3. Without your employer’s health insurance, adequate coverage is typically more expensive and harder to find. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
And then there’s long-term care. As healthy as you and your spouse are now, it is difficult to imagine a future where one or both of you may need long-term care or in-home assistance. However, most Americans will need long-term care as they age, with some statistics suggesting that 7 out of 10 people turning 65 will now require some form of long-term care in their lifetime4. As you can imagine, long-term care costs are steep and steadily increasing5. In 2022, the average monthly cost for a private room in a nursing home in Pennsylvania is over $11,000. But by 2030, that amount is expected to rise to over $14,0006.
There are several different strategies to prepare for healthcare expenses as you age. Be sure to rely on a financial professional to walk you through some of your options, which will help you secure your wealth without sacrificing your health.
Avoid These Mistakes!
It’s impossible to go through life without making mistakes, but that doesn’t mean you shouldn’t proactively plan to prevent obstacles and challenges that could threaten your hopes for a fulfilling retirement. Even if you’ve been planning and saving on your own for decades, now is not the time to wing it.
As your partner on your retirement journey, we at Butera Wealth Management can help you create the foundation necessary for a comfortable and worry-free retirement. To learn more about our services and how we can help you avoid these pitfalls (and others), schedule a free, no-obligation phone call by contacting us at 484-455-2661 or firstname.lastname@example.org. Learn how our 2nd Opinion Service can make a difference in your financial life.
Louis Butera is the founder and president of Butera Wealth Management, LLC, an independent wealth management firm operating out of Newton Square, Pennsylvania. With over 30 years of experience in the financial services industry, Louis specializes in serving pre-retirees who hold management or executive roles, particularly in the pharmaceutical industry. In 2015, he started his own firm with the express goal and vision of fostering meaningful relationships with clients to help them pursue financial independence and prepare for retirement. Louis and the Butera team provide a customized process to help their clients plan for every aspect of their financial life. Trust has always been key for Louis, and with this foundation, he has helped guide his clients through many different market cycles and life milestones.
Louis is a CERTIFIED FINANCIAL PLANNER™ professional and has a bachelor’s degree in business management from Ithaca College. When he’s not working with his clients, Louis enjoys being outside, playing golf, skiing, and leading an active life with his wife, Michelle. They are both great supporters of local charities and their community. To learn more about Louis, connect with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.