Most of the blogs today write about and promote early retirement. That's a great pursuit. Today, I'm going to take a little different approach to the conversation. I want to look at five mistakes I see people make after retirement.
There are many more we could list. We'll focus on the five I see most in my planning practice and those I read about in blog articles and mainstream financial media.
Along with early retirement, many of the personal finance blogs focus on financial independence. Why? Most of them are Millennials and Gen Xers whose goal is to gain financial independence as soon as possible. They want the option to choose their path. Having the financial means to walk away offers that choice.
Their three tenets are pretty basic – spend less than you make, save and invest the difference, reduce or eliminate debt. Basic doesn't always mean easy to implement. A lot of things compete for our money and time.
The bloggers I know are hard working, well educated, diligent savers who are frugal in their spending. In some cases, they are downright cheap. Those are the extreme cases and don't represent the norm. They do, however, have a strong voice in the community.
Mistakes at a young age aren't as hard to overcome as making mistakes after retirement. It makes little difference whether that retirement comes from someone in their thirties or their sixties. The errors can multiply and be hard to overcome.
We'll number the five mistakes for convenience purposes. They do not represent a list from most to least important.
Let's get started.
After retirement mistakes
#1 Not planning what to do with your time
No matter the profession, you are accustomed to a level of physical and mental activity that is about to shut down. That is unless you've planned for what to do. If you don't think about the adjustment in your daily level of activity, you could be in trouble. I've seen this with clients at my financial planning practice and in my own family.
My stepfather, Bob, taught pulmonary medicine at Indiana University. He loved what he did and probably would have done it longer. Circumstances (some health issues and my mother's urging him to retire) pushed him into retirement before he was ready. Though my mother had plans of her own for him, he hadn't thought about what he would do with his time. The adjustment of going from a high level, highly engaged professional position to nothing proved too much for Bob. As a result, he became depressed and had a tough first few years of retirement. His depression and unhappiness put a strain on their marriage.
Fortunately, in time things worked out. Bob took up painting and found it was something he enjoyed. He became pretty good at it. They began to travel more and spend more time doing the things my mother hoped they would do. After several years, they enjoyed the kind of retirement they had both hoped they would have. But it could have easily gone the other direction.
Consider working part-time in retirement. That could be teaching, working at a nonprofit that you support, driving a school bus, working at Home Depot or any other work that keeps you active. If you're a lawyer, consider pro bono work or legal consulting. Are you a doctor? Work part-time in a clinic. One of my clients does just that. He puts in 15 – 20 hours a week at a local clinic.
Write a book or an eBook about something you care about. Or maybe it's a fiction piece or a short story. Take classes at a local college. You don't have to learn about your field of expertise anymore. Learn something new, outside your area of expertise.
How about learning a foreign language? That's a big challenge at older ages. It is also good for the mind to keep it active and working hard. If something isn't growing, it's dying. Keep growing and stay active. Plan for that well in advance of retiring.
#2 Spending too little
I realize this may seem counterintuitive. After all, if we planned our retirement correctly, and got there on time or early, we are likely frugal people. Being frugal is a virtue unless it crosses over into an obsession with not spending money. If that happens it can hamper our happiness right at the time we should be enjoying ourselves the most.
People do more early in their retirement. They travel more, eat out more, exercise more, read more and many other things. Many people formed the habit of delayed gratification to accomplish the retirement they wanted.
A lot of people entering retirement have a hard time letting go of their money. You know that old saying. Old habits die hard. Remember, you planned for this. You've calculated how much money you needed, used the 4% rule (or something similar) to project how long your money would last and hit the mark.
Yet here you are, stuck in the rut of frugality that has you talking yourself out of spending on anything that isn't “necessary.” Needs vs. wants. We want this, but we don't NEED it. My advice – LET IT GO! Enjoy yourself.
Look, I'm not saying go out to eat every night, plan a trip to Europe in May, China in July, and South Africa in September. What I am saying is you can loosen the purse strings and do some of the things you worked so hard to be able to do.
Start small if you can't think big. Take a couple of weekend trips to places you haven't been. Eat out a couple of times a month. Spend a little money spoiling your kids or grandkids. Spend responsibly but spend. That's what you worked hard to be able to do.
#3 Claiming Social Security early
I've written about Social Security several times. One of those articles addresses the top four reasons to delay claiming. The #1 reason to delay is pretty simple – your benefit will be higher. If your full retirement age (FRA) is 66 and you claim at age 62, you get a 25% benefit cut. And that's a permanent cut. If your FRA is age 67, the cut is 30%.
If you wait to claim until age 70. you will get a higher benefit that ranges from 24% to 32% more.
Let's say your PIA at age 67 is $2,000. Claiming at age 62 reduces that benefit to $1,400. If you live until age 90, that reduction in benefits costs you $81,600 in lost income! That's a HUGE hit! Even if you only live until age 82, you lose $24,000 from the reduced monthly payout!
I always recommend planning for a longer life expectancy.
If you're married and claim early, it means your spouse's survivor benefit gets reduced too. Deceased spouse's get an exception to the age 62 minimum. A surviving spouse may apply for benefits as early as age 60. If so, they will only get 71.5% of what the benefit would have been by waiting until FRA. Waiting until after reaching FRA means they will receive 100% of the original benefit.
For example, let's say your deceased spouse's FRA benefit was $2,000. Assume you apply for survivor benefits at age 60; you'll receive 71.5% of his $2,000 benefit or $1,430. Waiting until you reach your FRA would get you the full $2,000. If your spouse waited until age 70 to apply (assuming an FRA of 66) his benefit would have been $2,640. If he dies and you wait until you reach your FRA, you get that $2,640 benefit for life. That's a difference of $1,210 a month or $14,520 annually.
Do the math before claiming your benefit. It's one of the few guaranteed inflation-adjusted incomes left. Don't waste it!
#4 Not thinking about taxes
The risk you take on your investments and the return you need should be tied to the plan you've developed. I like the 4% rule as a “rule of thumb” to begin the discussion. Retirement planning is much more than having 25x your annual expenses in funds you can draw out at a 4% rate. It's also about getting your retirement income in the most tax-efficient way possible.
In most cases, you're going to have several investment accounts. You might have an individual account, a joint account with your spouse that is taxable. If you had a corporate job, you likely have a 401(k). If you changed companies over the years, you probably rolled over those retirement plans into an IRA. You may also have a Roth IRA. You need to think about how to withdraw that money to maximize income and minimize taxes.
Conventional wisdom typically says to take out taxable money first and pay the lower capital gains tax rates. This allows the IRAs to continue to grow in their tax-deferred account. It may be the right thing to do. It may not. The conventional wisdom is often wrong. Every situation is different.
Here are some questions you need to answer:
Should I take money out of my taxable accounts first and then the IRAs? Take some money out of all of the accounts? Take traditional IRA and 401(k) money out, then taxable, then Roth IRA? How will these withdrawals affect my Social Security? Are my Social Security benefits taxable? How can I reduce my required minimum distributions?
Carefully analyze that tax consequences of your investment income before deciding what to do. It can help you keep more of what you earn and make it last longer.
#5 Not planning for healthcare expense
Healthcare costs are going up at an alarming rate. In this article from Fidelity Investments, they say that someone age 65 today can expect to shell out $280,000 in health care cost during their retirement years. This article from The Balance says that in 2017 the cost of health care is $10,739 per person. That's up from $146 per person in 1960. That's an average increase of 7.83%!
The vast majority of retirees got their health care from their employer while they were working. The employer covers roughly 75% of the costs while the employee picks up the other 25%. Unless you work for the federal government or a very generous employer, those numbers will change significantly when you retire. You become fully responsible for your health care in retirement. That means you need to understand your options.
At age 65, you become eligible for Medicare parts A & B. From Medicare.gov: “Medicare Part A hospital insurance covers inpatient hospital care, skilled nursing facility, hospice, lab tests, surgery, home health care.” Part B medical insurance covers, “doctor and other health care providers' services and outpatient care. Part B also covers durable medical equipment, home health care, and some preventive services.”
Part A hospital portion has no premium charges. Medicare bases Part B costs on income. Prices range from $135.50 per year for those making up to $85,000/year to as high as $460.50 for those making over $500,000.year. There are deductibles and coinsurance options to consider. Part D covers prescription drugs. Medicare Advantage plans wrap all of these coverages into one package.
If you don't budget, plan, and save for health care costs in retirement, it can have a significant impact on your lifestyle.
Here's a health care calculator from AARP to help project your costs.
There are lots of things to consider in retirement. The mistakes listed here are ones I see made most often. Careful planning and budgeting will go a long way to help you avoid these mistakes.
Be willing to be flexible. If your circumstances change along the way, be prepared to change with them. Lots of things can happen along the way to interrupt your plans: job changes, divorce, illnesses, or a change of mind on what's important to you. When we get older, those things often change.
Retirement life is, in many ways, similar to your life at work. Why? Life happens. Be agile and adaptable to change in retirement just as you were when you worked. Follow your plan, review it often, and adjust when necessary.
Be aware of and avoid the five mistakes listed here to improve your odds of being successful. Then go out and enjoy the fruits of your labor and live the good life you worked so hard to achieve.