Money Mistakes to Avoid If You’re Close to Retirement

  by Shelley Seagler

The goal for most investors is to generate the most profit with the least risk over time, but those approaching retirement have entirely different goals. Since they’re actively drawing down a retirement account, an investor’s goal shifts from capital appreciation to income and capital preservation. The most important objective is to ensure that they have enough money to fund their retirement, which means taking on relatively low levels of risk.

Free Download: The Ultimate Retirement Planning Checklist

In this article, we will look at common money mistakes to avoid if you’re approaching retirement with these key differences in mind.

Operating Without a Plan

The single biggest mistake for investors approaching retirement is operating without a plan. It’s important to understand how much money you need during retirement and ensure that you’re saving enough to meet those needs. If you last ‘ran the numbers’ in your 30s, you should recalculate them to account for any gap years or periods without contributions to ensure that you’re still saving enough to finance your retirement.

There are many different retirement calculators on the Internet, but the AARP’s Retirement Calculator is one of the most comprehensive options for investors. Of course, it’s usually a good idea to also work with a fee-based financial advisor that can provide insights into your specific situation and recommend investments without a bias towards funds that compensate them – as is the case with commission-based financial advisors.

Too Much Real Estate Debt

Retiring with a home mortgage isn’t necessarily a bad thing, but having a mortgage or home equity line of credit (“HELOC”) that you can’t afford is a recipe for disaster. In some cases, those approaching retirement have a mortgage and HELOC with monthly payments that can be difficult to pay from retirement income alone. Most people don’t want to be working a side job in retirement just to make enough money to pay off these debts!

If you’re approaching retirement with real estate debt, consider prioritizing repayment of that debt to get to a state of debt that you can support with what you want to live on in retirement. The goal for those approaching retirement should be to maximize income from investments and minimize their living costs in retirement. This is especially true because retirement income is still taxed at standard income tax brackets.

Failing to Consolidate Accounts

You’ve probably had a long career spanning multiple employers, but did you remember to rollover your retirement accounts when moving between them? Unfortunately, forgetting to pack up retirement savings when switching jobs can be a costly mistake. These accounts may have inaccurate contact information, out-of-date asset allocations, and can even be left in cash if an employer was unable to reach you to confirm changes to the plan.

The simple solution is to rollover any old accounts into your current employer’s account or even better your personal retirement accounts. In general, this means calling up human resources and requesting a few forms that need to be filled out to facilitate the process. These basic steps can help ensure that your asset allocations are on track and all of the savings you’ve accumulated over the years are accounted for in a single place.

Using the Wrong Types of Accounts

There are many different types of retirement accounts. Traditional wisdom suggests that capturing a matching 401(k) contribution is the best way towards a secure retirement, but in reality, there are more complex considerations. Investors approaching retirement should consider consulting with a fee-based financial advisor to consider their options, particularly as they face higher medical costs and other factors.

For example, employee contributions to a health savings account may build more wealth than similar contributions to a matched 401(k) due to the triple tax break. Contributions are made with tax-free dollars, assets grow tax-free, and distributions are tax-free if they’re used to cover medical expenses. By comparison, traditional retirement accounts are tax-deductible up-front but taxable upon distribution and vice-versa for Roth accounts.

Not Having a Plan for Social Security

Social Security plays an important role in retirement planning. While it may be tempting to take Social Security at age 62, there is a penalty for withdrawing too early and a credit for delaying withdrawals. Taking Social Security earlier than full retirement can result in a permanent 1% monthly reduction, while delaying Social Security for a couple years can result in a benefit as much as 16% higher than what they would have received.

There are several different factors to consider:

  • Cash Requirements – Those with sufficient resources can be flexible about when to take Social Security benefits, but those that need Social Security have less of a choice.
  • Life Expectancy – Taking Social Security early may reduce benefits, but it also means that you’ll receive the benefits for a longer timeframe, which may be worth it.
  • Your Spouse – Social Security involves Survivor Benefits, which means that the decision should include your spouse’s life expectancy.
  • Working Status – Earning income can reduce Social Security benefits, which could make it worthwhile to wait until full retirement.
  • Tax Concerns – Taxes can take a chunk out of Social Security, Medicare premiums, and other benefits, which makes income important to consider.

Taking on Too Much Risk

Most investors should have a glide path for their investments, which creates an asset allocation that becomes more conservative over time. After all, investors may want a risky portfolio when they are young, but capital conservation becomes the most important factor as retirement approaches. While some retirement accounts have automatic glide paths, others don’t have anything automatic setup and manual rebalancing may be necessary.

The easiest solution to avoid taking on too much risk is using funds with an established glide path, such as target date retirement funds. Investors may also want to consider using less-risky strategies, such as covered calls options to generate income, rather than actively trading stocks for capital gains. The goal is to reduce portfolio volatility over time and transition from capital gains focused equities to income producing assets like bonds.

Free Download: The Ultimate Retirement Planning Checklist

The Bottom Line

The goal for investors approaching retirement is to preserve capital and ensure that they have enough money to meet their retirement needs. Unfortunately, there are many common mistakes made by those approaching retirement that can prove very costly.

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