Planning for Retirement? Avoid These 3 Costly Mistakes

You’ve worked hard, saved your money, invested diligently and finally (hopefully, on your terms), you have decided it’s time…time for retirement. Will your retirement nest egg last your lifetime?

The key to a successful retirement is to have a plan–an ongoing plan tailored to your unique financial needs and goals. When creating your retirement plan, it is important to beware of some common and costly financial mistakes.

Avoiding these mistakes should help keep you on track for a secure retirement.

1. Underestimating Life Expectancy

When does your retirement plan end? At the age of 75? 85? 95? Underestimating your life expectancy can put you in the position of running short on cash, or even running out of money entirely.

The life expectancy for people at age 65 years old has increased significantly among both men and women over the past several decades. Given the advances in healthcare and science, it is quite possible you could live well beyond your average life expectancy. According to the Social Security Administration, the life expectancy for men reaching age 65 on April 1, 2020 is age 84 and age 86.5 for women1.

When planning for retirement, start with average life expectancy figures, but remember that these numbers are just averages. Many people (almost half the population) live beyond these numbers. It’s important to factor in your own personal history (current health, genetics, lifestyle) to calculate a more probable expected lifespan.

2. Investing Too Conservatively

Investing conservatively to avoid volatility may seem like the safe and prudent way to go for some retirees; however, the growth of your portfolio could be severely limited. Will your retirement funds be able to last a potential 25 or 30-year timeframe with a low rate of return?

Risk of losses is usually associated with more aggressive investing, so investors often assume that conservative investing—accepting lower returns to limit risk—is an ideal strategy for capital preservation. While conservative investment strategies are historically more stable, some seemingly safe investments hold hidden risks that can deflate your retirement income.

It may sound like a contradiction in terms but investing too conservatively may not be as safe as it sounds.

More conservative investments (bonds, cash, CDs, etc.) have a low return on investment, and low interest rates are partially to blame. As of November 18, 2020, the U.S. government is offering a guaranteed 0.873% on U.S. 10-Year Treasury Notes2. This rate is guaranteed as long you hold your bonds to maturity; however, this rate is not guaranteed to keep up with inflation or distributions from your account. How long do you think your portfolio will last when you are earning less than 1% interest combined with an estimated inflation rate of 2% (or more) each year? Your investments risk losing their purchasing power as inflation outpaces investment returns.

As a financial advisor, I not only see clients who are too cautious, but conversely, clients who invest too aggressively. Striking the ideal balance between risk and reward is often the most import factor in determining your financial stability in retirement. Read more about how to best prepare for the financial risks faced during retirement.

3. Making Tax Mistakes

As the old saying goes, “…in this world nothing can be said to be certain, except death and taxes.” Tax planning does not end when you retire. Not understanding ever-changing tax rules could quickly eat into your retirement funds.

Navigating the myriad of tax rules can be daunting. The 2017 TCJA (Tax Cuts & Jobs Act), the 2019 SECURE Act (Setting Every Community for Retirement Enhancement), the 2020 CARES Act (Coronavirus Aid, Relief, and Economic Security), and a new White House administration with new tax proposals (Biden Tax Plan Analysis) on the horizon—who can keep up?

Here are couple of examples of tax mistakes:

1. 401(k) Rollover Errors: Often, retirees transfer 401(k) workplace savings to an IRA (individual retirement account) when they leave their employer. Rollovers must be done properly or will be subject to unnecessary taxes, so be sure to review the rules before you move your assets.

Example: If you have $1,000,000 in your 401(k) and decide to rollover the funds into an IRA, but you incorrectly process the transaction as a distribution, your employer will withhold 20% of the transaction ($200,000). The deposit into your IRA will only be $800,000! You will either need to write a personal check for $200,000 or be stuck with an additional $200,000 of income on your taxes, which could add $40,000 or more to your tax bill, plus penalties!

2. Required Minimum Distribution Errors: RMD rules can be confusing. Not withdrawing enough, taking your distribution from the wrong account, or not taking the distribution entirely are common mistakes made by retirees.

Example: If you have $1,000,000 portfolio with a $40,000 RMD that you forget to take, you will be taxed a whopping 50% on the $40,000. That is a staggering, unnecessary loss of $20,000!
Retirement planning can be complex, and mistakes can take a bite out of your hard-earned retirement funds.

Retirement planning can be complex, and mistakes can take a bite out of your hard-earned retirement funds. If you want to make sure that you are on track for a successful retirement, schedule a no-cost initial meeting with one of our expert financial advisors at Capital Advantage, Inc. Contact us today!

1https://www.ssa.gov/benefits/retirement/planner/otherthings.html
2https://www.marketwatch.com/investing/bond/TMUBMUSD10Y?countrycode=BX

The Author: Ben Agron, CFP®

Benjamin Agron is a Financial Advisor at Capital Advantage. He is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Chartered Retirement Planning Counselor (CRPC®) and an Investment Advisor Representative. Ben is part of the investment team, and is responsible for developing and maintaining client relationships, assisting with sales and marketing projects, and financial planning.

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