7 Mistakes to Avoid in Retirement Planning
It's complicated, this retirement thing.
We keep hearing we need to save more money than we've saved. We're worrying about if we have enough to survive a health-care crisis in retirement. And in the middle of all that, we're trying to figure out if we can, indeed, wait a few years before we start taking those Social Security checks like all the financial advisers are telling us.
There's a lot at stake, and most of us can't afford to screw up. So, we talked to financial planners about some of the most frequent mistakes they've seen. Of course, they have seen a lot. Here are the top seven.
1. Are you really going to spend less when you retire? High on the list of financial planner Joe Heider, regional managing principal for Rehmann Financial Group in Westlake, Ohio, is the assumption that you will spend less money in retirement than you do in your working years.
The rule of thumb among some financial planners is that most people will spend 80 percent of what they spend while working — the assumption being that you won't have to pay for that daily commute, that work wardrobe, lunches, etc. But, Heider says, that assumption is wrong, especially in the early years.
"Most people, in my opinion, initially after they retire, actually spend more money than when they were working," he says. "When you have a job, you are in your office and you are not spending money. But now you have 24/7 to shop, travel and do all the things people couldn't do before."
2. Do you really need that much money in bonds when you retire? The old rules of retirement were to go 60 percent stocks 40 percent bonds as you neared retirement, and go 80 percent bonds when you actually reach retirement. That would be a huge mistake today, says Karen Wimbish, director of retail retirement at Wells Fargo.
"Today if you go that conservative, you won't be able to keep up with inflation," she says. "The old formula was based on your parents, who lived 10 years in retirement. People today will live a lot longer. They need to keep growth in their portfolio. The mix should be 50-50 (50 percent in stocks, 50 percent in bonds) instead of 80/20."
"I don't think they appreciate how much money it takes to fund their lifestyle," says Heider, "particularly where we are with historically low interest rates. It takes a lot more money to fund a lifestyle today if you fund it on lower-risk, fixed-income types investments."
3. Are you taking into account inflation? "There is a tendency for people in retirement to be way too conservative in their investments," says Heider. " They think that they no longer feel a need to hedge against inflation. Assume you'll have 25 years of retirement with 3 percent inflation: "Unless you have growing income, you would have a significant decrease in purchasing power," Heider says.
4. Does your spouse have power of attorney, and are all accounts held jointly? "I had a client with $756,000 in financial assets, of which $686,000 was in the husband's name in retirement accounts," says Curt Knotick, investment adviser with Accurate Solutions Group in Cleveland. "He was sole breadwinner, and she was a stay-at-home mom. But he had a stroke. His wife had no access to those assets because she had no power of attorney. With an IRA or qualified assets, the spouse is not a joint owner but a beneficiary. The spouse had to petition the court. That can be completely avoided with a $100 power of attorney."
Also, make sure you have an estate plan, says Mike Piershale of Piershale Financial Group in Crystal Lake, Ill. "My wife died prematurely of cancer," he says. "People think that can never happen. If there is not an estate plan, it can lead to a lot of costs and expenses that can set a retirement back for a surviving spouse."
Also, Piershale says, many married couples have accounts in just one spouse's name. "If that spouse passes away, it goes through probate before the surviving spouse gets the money. With death of second spouse, it goes to probate again."
5. Are you assuming that because you haven't saved enough for retirement, you can keep working into your 70s? "How many people do you see on your job in their 70s?" asks Wimbish. "Many of us assume we will find a job or keep our current job or be healthy enough. It is questionable whether you will be able to work that long."
People don't view retirement in the long term, says Heider. "If a married couple retires at 65, there's a 50 percent chance one will live into their mid-90s. If you live another 25 years, you're in retirement for half of your working life. If you retire at 60 you are almost in retirement as long as you were working, and you need to account for inflation."
6. Are you underestimating health care costs? "People are living longer, so they will have health care," says Wimbish. "Many people think Medicare will cover all their medical expenses." It doesn't. Payment depends on the type of treatment. "And it also doesn't cover dental, vision and hearing," Wimbish says. "Older people need one or all of them. They underestimate what they will have to pay. It could be a substantial amount of money. It could be $250,000 in retirement. And that doesn't cover skilled nursing."
7. Are you prepared psychologically for retirement? "The psychological mistakes are tougher in my opinion," says Heider. "Many people identify what they do as who they are," he says. "It is their identity. It can be difficult to let go of that. People need to look at what are their hobbies. People retire and they don't have hobbies, things they enjoy doing.
"We've seen where people retire and are miserable," he says. "It puts a strain on marriages. Couples have different views on what retirement will be. Children are raised, and now they are spending 24/7 with each other. It can put a strain on relationships. The nature of a marriage or relationship changes dramatically when you are together 24/7 compared to being together after 5 until you go to bed."