Wisdom, they say, is a gift granted to the elderly.
That may be true when it comes to emotional insight, but on the money management front it turns out those 65 and older make just as many missteps as the rest of us — some so big that it puts their standard of living in jeopardy.
Jumping on Social Security
It’s tempting to collect benefits as soon as you’re eligible at age 62.
You’ve paid into the system your entire working life, after all, and you don’t want to get shortchanged if you die prematurely. Right?
Wrong, says Jean Setzfand, vice president of financial security for the AARP, noting the amount you receive when you start taking benefits permanently impacts the amount you will receive monthly for the rest of your life.
“People feel like they’re going to get the raw end of the deal if they delay taking Social Security,” she says. “But it’s the amount of your monthly income that really impacts your standard of living.”
Here’s an example: Assume your full retirement age is 66 and your monthly benefit starting at that age is $1,000.
If you opt to begin taking benefits early at age 62, your monthly check will be reduced by 25 percent to $750 to account for the longer period of time you receive benefits.
Had you waited until age 70, your monthly benefit would be $1,320 — money that can help cover the bills as your living expenses rise.
Too Many Bonds
Another financial faux pas many seniors make is to invest too conservatively.
An allocation that’s overweighted in bonds won’t generate the income you will need to ensure your savings last longer than you do, says Greg Hammond, a certified financial planner and president of Kelly Financial Group in Wethersfield, Conn.
“The old rule of thumb was that when you retire you should make your investments more conservative, and there’s some truth to that, but you don’t want to end up trailing inflation, especially when many of us are facing the possibility of living well into our 90s,” says Hammond.
His advice? Project your retirement living expenses (ideally before you quit working) so you know how much you’ll need to save and what allocation of stocks and bonds is appropriate for you. In other words, start with the savings goal, and adjust your asset allocation accordingly.
It depends on your savings and appetite for risk, of course, but most retirees should have no more than 20 percent to 30 percent of their portfolio earmarked for fixed income, says Hammond.
Too Much Plastic
It’s easy to get in over your head when it comes to credit-card debt, and retirees are no exception.
According to New York-based research group Demos, those 65 and older from low- and middle-income households carried average credit card debt of $9,283 in 2012, the highest debt load of any age group in the survey.
Since 2008, seniors reduced their credit card debt by 6 percent, but here again, that reflects the smallest decline of all age groups, according to the survey. During the same four-year period, those ages 25 to 34 reduced their balances by nearly 51 percent.
“Seniors rely on their investments and money from their 401(k)s, and with the financial crash that resource is not as available as it has been,” says Amy Traub, senior policy analyst at Demos. “Hence, we haven’t seen the large decline in credit card debt among seniors that we’ve seen among other age groups.”
Setzfand notes many retirees use credit cards to pay for basic necessities when their income from Social Security, annuities, and other sources can’t keep up.
“They’re putting medical bills on their card and we see a growing trend in that area,” she says. “It ends up being a major cause of default and eventually bankruptcy.”
Too Much for the Kids
Parents all want the best for their children. But you can do serious harm to your own financial security — not to mention your credit score — when you become the bank of mom and dad (or grandma and grandpa).
Hammond says that happens all too often in this economy, as adult children move back in with their retired parents after losing a job, or ask them to co-sign for a mortgage loan amid tighter lending restrictions.
“Parents want their kids to have it better than they did, but that creates a lot of problems,” says Hammond. “Whether they co-sign for a loan or sacrifice their own retirement savings to send their kids to college, you have to be careful that you don’t put yourself in the position of running out of money.”
Remember, he says, your kids and grandkids can get a loan for college, and if they can’t qualify for a home or car on their own, they probably shouldn’t buy it to begin with.
Allan Katz, a certified financial planner and president of Comprehensive Wealth Management Group in Staten Island, N.Y., says many retirees also make the critical mistake of failing to factor inflation into their projections.
According to the Bureau of Labor Statistics, the annual inflation rate has averaged roughly 3 percent per year over the last 30 years.
During that same stretch, the Consumer Price Index, which measures the change in the price of goods and services paid by U.S. households, climbed 142 percent.
“You may figure that you’ll need 80 percent or more of your salary per year during retirement, but even if you estimate a longer life expectancy into your 90s you may run out of money because costs are going to go up,” says Katz, noting inflation can quickly erode the value of your nest egg. “People don’t have a clear understanding of what risk they are up against. They only think about principal risk.”
Discounting Big Medical Bills
During their accumulation phase, many retirement savers also assume their expenses will go down after they quit work and pay off the house, but the reality is many seniors face higher bills than ever.
For some, it’s by choice — travel plans or a new house in Florida or another top retirement area. But more often than not, higher costs are the result of higher medical expenses.
A 2012 health care cost estimate by Fidelity Investments found that a 65 year-old couple retiring this year would need $240,000 to cover medical expenses throughout retirement.
The estimate has increased an average of 6 percent annually, nearly twice the rate of inflation, since Fidelity’s initial calculation in 2002 — with the exception of 2011 when the estimate declined $20,000 as a result of a one-time adjustment to Medicare.
“People just think that when they’re 65, Medicare will cover them, but they don’t realize they still have to pay for premiums and co-pays,” says Katz, noting that chronic conditions like diabetes and high blood pressure can cost thousands of dollars per month to manage.
Following Bad Advice
After a lifetime of saving and sacrifice, it hardly seems fair that one wrong turn — or a series of them — can rob you of a comfortable retirement.
With so much at stake, AARP's Setzfand says seniors should consult reputable advisers who can help them make informed decisions.
“For many seniors, the main source of financial information still comes from family and friends,” she says, noting even the most savvy family members may inadvertently steer you wrong since they’re often providing guidance based on an incomplete financial picture. “Even a one-time investment in a professional financial planner who can look over the global aspects of your finances is better than relying on informal sources alone.”