10 Missteps to Avoid in Retirement
Because no two retirements are the same, very few hard and fast rules exist. That said, here are a handful of things that should be no part of any retirement.
You wouldn’t plan a trip without knowing how much it costs. Nor would you retire without knowing its costs. Quantifying costs sets expectations on spending goals and whether they are reasonable. Likewise, building a spending plan based on expenses likely to change in retirement will approximate actual costs. I discuss several ways to do this in How to make a retirement budget.
You’ll need to know how to fund retirement to decide if the spending plan is reasonable. Knowing your income tools (assets and sources of income) will determine whether it’s sensible or if revisions or additional resources are needed. All income tools should be on the table, including cash, invested assets, annuities, pensions, Social Security, insurance, housing wealth, part-time work, family support, and social safety nets.
Spending in retirement with little to no concern for how much to spend is like swimming with sharks without a shark cage. You can do it, but there are safer ways. Knowing if sufficient assets exist to fund retirement spending will prevent overspending and exhausting assets and underspending and diminishing the standard of living.
Lack of Income Strategy
Drawing down assets without running out of money is the fundamental challenge of retirement. Choosing the most appropriate strategies can be the difference between financial security and hardship. An income strategy can produce steady and reliable income, often with less risk than assumed. Learn more about income strategies and which may be appropriate for your Retirement in The Markets and Your Retirement and Spending from your Portfolio in Retirement.
Claiming Social Security Early
Social Security benefits are a core component of retirement income for many Americans. This underscores the importance of finding ways to maximize this income source. Studies show most claim benefits early, typically at retirement, and in the process, forgo hundreds of thousands of dollars of lost income. When to claim benefits and when to stop working can be different decisions. First, consider your financial situation, such as assets, work availability, health, and taxes, before deciding when to claim.
Retirees face a whole host of pitfalls in retirement. From outliving assets and dealing with market volatility to untimely spending contingencies and stubborn inflation, finding ways to deal with risks effectively is essential to protecting spending goals and maintaining the quality of life. No retirement plan is complete without proper consideration for managing risks effectively. See 3 Retirement Risks That Should Be On Every Retiree’s Radar to learn more.
Taxes are one of the few areas you have some control over in retirement, so minimizing tax costs can preserve assets, support higher spending levels, and increase the standard of living in retirement. Smart tax planning includes tax diversification to position assets in accounts that offer the best tax treatment, tax-efficient distributions that prolong the sustainability of assets, and tax bracket management to minimize tax liability.
Disregarding Spending Patterns
Assuming constant inflation-adjusted spending throughout retirement overstates the savings needed to retire. Studies show retiree spending doesn’t keep pace with inflation and adjusts according to changes in behavior, where spending peaks early and late in retirement and dips during the middle retirement years.
Failing to transition from an accumulation to a distribution mindset in retirement can put assets at increased risk, reduce spending, and increase anxiety. While asset growth and robust returns are essential savings for retirement, building a steady and reliable income stream takes on greater importance during retirement.
Downplaying Non-Financial Aspects of Retirement
Building sufficient assets to fund spending goals is necessary to achieve the desired outcome, but money alone doesn’t lead to more retirement satisfaction than pre-retirement. Retirement fulfillment depends on successfully checking off both financial and non-financial aspects. Finding purpose and passion for guiding retirement, striking the right balance with work in retirement, strengthening and maintaining social connections, and engaging in activities that promote an active and healthy lifestyle is just as essential to retirement success.
There are very few guarantees in life. You can do everything right and still get a less-than-hoped-for outcome. Retirement is no different. For retirements that include the above things, chances increase for an undesirable retirement outcome. To avoid this, be cognizant of what they are and build measures into your retirement income plan to avoid or mitigate their impact.