22 Aug Beware of Major Retirement Planning Mistakes
Much has been written about the classic financial mistakes that plague start-ups, family businesses, corporations and charities. Aside from these blunders, there are also some classic financial missteps that plague retirees. Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.
The full retirement age for many baby boomers is 66. As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for greater retirement income.1
Some of us are forced to make this “mistake”. Roughly 40% of us retire earlier than we want to; about half of us apply for Social Security before full retirement age. Still, any way that you can postpone applying for benefits will leave you with more SSI.1
You may have heard of the “4% rule”, a popular guideline stating that you should withdraw only about 4% of your retirement savings annually. The “4% rule” isn’t a rule, but many cautious retirees do try to abide by it.
So why do some retirees withdraw 7% or 8% a year? In the first phase of retirement, people tend to live it up; more free time naturally promotes new ventures and adventures, and an inclination to live a bit more lavishly.
It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming that your retirement will be long, you may want to assign that or that investment to it “preferred domain” – that is, the taxable or tax-advantaged account that may be most appropriate for that investment in pursuit of the entire portfolio’s optimal after-tax return.
Many younger investors chase the return. Some retirees, however, find a shortfall when they try to live on portfolio income. In response, they move money into stocks offering significant dividends or high-yield bonds – which may be bad moves in the long run. Taking retirement income off both the principal and interest of a portfolio may give you a way to reduce ordinary income and income taxes.
Account fees must also be watched. The Department of Labor notes that a 401(k) plan with a 1.5% annual account fee would leave a plan participant with 28% less money than a 401(k) with a 0.5% annual fee.4
These are some of the classic retirement planning mistakes. Why not plan to avoid them? Take a little time to review and refine your retirement strategy in the company of the financial professional you know and trust.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
The payment of stick dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
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1 – moneyland.time.com/2012/04/17/the-7-biggest-retirement-planning-mistakes/ [4/17/12]
2 - money.usnews.com/money/blogs/planning-to-retire/2012/05/10/fidelity-couples-need-240000-for-retirement-health-costs/ [5/10/12]
3 - www.forbes.com/sites/ashleaebeling/2012/08/10/americans-clueless-about-life-expectancy-bungling-retirement-planning/ [8/10/12]
4 - www.post-gazette.com/stories/business/personal/shop-smart-avoid-seven-common-errors-in-retirement-plans-635633/ [5/13/12]