When you retire, what do you want your lifestyle to look like? Do you want to dine at fancy restaurants and travel the world or live off a tight budget and constantly stress about the size of your retirement fund? You see, building for retirement is a life-long journey and you could put your golden years in jeopardize if you make the wrong financial decisions. Luckily boss, I want you to avoid that future headache by sharing with you 5 mistakes you must avoid when retiring and if you’re new to the channel then hit the subscribe button below for more life changing content!
Let’s face it, we all want an enjoyable retirement. No matter how much you love your job, having the ability to enjoy the fruits of your labor that you’ve worked for decades to build is something to cherish. And the good news is that anyone can set themselves up for an amazing retirement however it does take careful planning that must commence when you are young. Not only does this expand the time horizon you have to invest for your later years, but it allows you to better weather financial uncertainties that come with economic downturns, many of which we have experienced in the recent past. Not to mention, starting to save at an earlier age allows you to better address factors such as inflation and healthcare.
Unfortunately, even with these factors considered, there are mistakes that early retirees or any retiree for that matter can make that will dramatically impact the quality of their post-career life. This is why it pays to be informed, not only when you start retirement but also during the years leading up to it. An early retiree has to be thinking ahead and have realistic plans about the future, but it’s all too common that the wrong financial moves end up being made. The Federal Reserve places 36% of adults who haven’t retired as believing their finances are on track for retirement, another 44% are sure they’re on track, and the remaining are not. This leaves a lot of people with questionable futures to have to deal with and these issues will only be compounded when making these 5 mistakes once their retirement finally comes.
Mistake #1: Not Phasing Into Retirement
Don’t make the mistake that many early retirees make, by picking a random age and then working to save the amount needed to reach their goal. Since a black and white number approach never reflects reality, your early retirement goals can become unattainable unless you gradually phase out the process.
By making the end of your career come in phases, you can gradually downshift to early retirement and still work from home, work part-time, or switch to a less demanding job. A slow transition into early retirement will make it easier to bridge potential psychological and financial gaps that may appear between your career and full-time retirement. Starting early retirement by working less will move your focus from the cessation of the working life, allowing you to envision your total retirement earlier.
An excellent example of a phased-out retirement would be a 45-year-old employee that’s looking to retire at 55 and makes an annual salary of $100,000. So that the monthly benefits for this individual are more substantial, they plan to wait five years after becoming eligible before drawing social security. Using this strategy, the early retiree with an above-average salary history will be collecting nearly $31,000 per year in retirement benefits.
If the early retiree had quit their job entirely at age 55, all expenses would have to be covered solely by their retirement savings until they became eligible for social security. The best course of action would be to reduce their workload gradually, making at least $50,000 in wages from age 55 up to 59. Such a phased out early retirement would see the retiree collecting $30,000 from the age of 60 until 63, ultimately cutting back on the amount of withdrawals from their personal retirement account.
Mistake #2: Not Setting Up Multiple Streams Of Income
Early retirement will involve more than building your nest egg until it’s ready to hatch, and then cracking it to pay for your after-work years. Maintaining a proper lifestyle during retirement will require that you have multiple income sources, and not rely only on your investment options or retiree savings.
There are also psychological benefits of relying on more than one source of income. During multiple resources planning, however, it’s essential to account for inflation, which is not adjusted for your pension. Your social security benefits, which you can also claim early, are annually adjusted to cover your Medicare costs from inflation.
By investing in assets like real estate and certain recession-proof stocks, you ensure that the value of your money continues to grow despite inflation. There’s a higher payout of around 8% for every year benefits are not claimed after age 62, and you also can’t withdraw from your 401 (K) or IRA investments until you are 59 and a half years old. Otherwise, your withdrawals will attract a surcharged penalty of 10%, which reduces your income further and places you in risk of depleting your retirement savings.
Your perfect early retirement plan should include additional income sources from which you can depend on before you reach 59½ years old. These backup resources could consist of part-time work, stocks, bonds, taxable brokerage accounts or assets like real estate rentals in addition to your retirement nest egg.
A large portion of your retirement investment may be in stocks or growth options that help your savings last long after you retire. This approach is advisable only if the stocks have a history of stable performance, as facing a recession or market downturn may affect your long-term assets disproportionately due to the sequence of returns risk.
While most workers will automate their investment or 401(K) savings, it’s vital for early retirees to consider taking an interest in these and other investments, such as low-cost mutual funds or ETFs. Any money that you invest in the stock market should be that which you can afford to lose should the stocks fall, and not funds from your retirement savings or investments.
To maintain your desired level of income during turbulent market downturns will require withdrawing from declined value accounts, necessitating that you liquidate more assets. Plan your multiple streams of income based on the conditions of the market and be flexible with your annual withdrawal amount from an investment account. Don’t be tempted to dip into your retirement fund balance for an extravagant purchase, as you may not be able to replace it as an early retiree. Always keep in mind that your withdrawals from investments such as an IRA will attract income tax, and penalties accompany distributions taken before you are 59½ years old.
Mistake #3: Mismanaging Social Security Benefits
Though it makes solid financial sense to wait as long as possible before collecting social security for your retirement benefits, you risk compromising your reliance on your financial assets. Sure, you may receive more monthly benefits if you defer these collections until you’re older however this is not always the most advisable move.
A good reason to start collecting your social security benefits early is if you’re in a job that’s not good for your health, where you’ll only be earning what you’ve worked for all these years. By staring early after retirement to collect benefits, you will be getting paid more money through the last decades of your life when you need it most.
Waiting too long to sign up for social benefits also means that if you don’t live past your eighties, you’re leaving money on the government’s table, and these are funds which are not transferable. A reduced monthly payout is better than no benefit at all.
To sum up this point, here are three situations where it might make sense to collect your social security benefits sooner rather than later.
First, you’ve reached the eligibility age of 62 and want to use the money in the earlier days of your retirement. Second, your total income requirements will require that you withdraw from your retirement account for more than 5% of your nest egg’s total which increases the risk of premature draining of your account. Lastly, you need additional income from social security despite the monthly payments being less before attaining the age of 70, reducing the risk of over-dependent or depletion of savings.
Mistake #4: Overlooking Health Costs
Your health insurance, while you are working, is probably provided for by your employer, and when you’re fully retired at 65 or older, you’ll be primarily covered by Medicare. When you retire early, there can arise bewilderment regarding your health insurance options as you fall between the employed and the fully retired.
Unfortunately, things are not made easy by the current health insurance climate of uncertainty. A financial adviser or health insurance specialist will recommend the best options and the most comfortable rates for your early retirement. If you have a spouse at this juncture who is continuing to work after you’ve retired, it makes sense to join their health insurance plan. The affordable care act provides each state’s health care exchange as an affordable insurance option for the time being, and tax credits for your lowered retirement income may include assets to offset premiums.
There is also Direct Primary Care to consider, an alternative health insurance model that will charge you a flat monthly rate for any routine primary medical care services. I recommend that you buy long term health insurance before taking early retirement, since premiums will increase as you age.
Also, don’t spend too much on your health premiums when you are in the earlier stages of your retirement and are still healthy and active. It’s when you get older that the effects of aging require that your health insurance arrangements pay off, since you will require care, and you can’t rely on government policy Medicare.
Remember that even with supplemental cover and Medicare, you still need to pay for insurance deductibles, and there are medical procedures that may not be part of your cover. Alongside insurance co-pays that can accrue over time, Medicare doesn’t cover optician’s services, dental care, or hearing aids. Fidelity published that the average American couple’s retirement healthcare will cost them over $285,000 without including long term care services. With Medicare covering only 80% of your healthcare costs during retirement, you can purchase supplement cover, dish out of pocket, or keep very healthy.
Earmarking some extra funds for such old-age health expenses will see you live out the rest of your retirement in comfort.
Mistake #5: Not Considering Your Legacy
Over 40% of elderly parents provide their adult children with financial support in one way or another. The children of early retirees tend to be younger and more dependent than usual, making the financial burden unbearable for some. If you have more than one child to support after early retirement, you might find yourself spending more than $1,000 monthly, which is not uncommon.
Factoring your financially dependent children in your early retirement plans will mitigate unexpected expenses and the relationship strains that accompany them. Instead of cutting off your grown children, talking to them before retirement will establish the financial support they should reasonably expect from you. To prevent your financial plans from being threatened by additional money requests, set the ground rules with your children on how much and how long you will give them support.
Ultimately, when you retire, you want assurance that your financial future is stable. Your sacrifices to put away retirement funds, your investments, and the social security retiree benefits play vital roles when it comes to planning for early retirement. Don’t compromise your financial capabilities during your golden years by overlooking these retirement mistakes!