Five crucial mistakes that often slip under the radar for retirees can cost them large sums of money, often reaching into the hundreds of thousands, if not millions of dollars, over the course of their retirement.
We specialize specifically with retirees, and it's crucial for our clients to grasp the interconnected nature of many decisions they will make in retirement. Just as a current investment is intended to yield future returns, your choices up to and at the beginning of retirement are going to reverberate and impact your financial wealth down the line.
To go a bit further, we often see people, inadvertently, make uninformed decisions that will cost them throughout their retirement.
So here are the five costly mistakes we often see retirees make:
1. Emotionally Changing Asset Allocation
First mistake, investment allocation, (aka asset allocation) - a cornerstone for everyone, right. General advice often disregards personal goals and needs. It's crucial to align your investment mix with your specific goals and income requirements, steering clear of generic strategies that might not suit your unique circumstances, or have you invested in Wall Street's “shiny new object” that you don’t need and generally won’t help you anyway.
You also have to consider the impact of emotional reactions to unpredictable events like elections, or war, or any economic shift. Fear and emotion can cloud judgment, affecting investment choices. For example, if emotions cause people to switch from having 70% of their investment portfolio in stocks, to 50% or 40%, over a few years, the difference in returns could amount to substantial dollars, therefore altering your long-term financial health and goals.
2. Not Implementing Asset Location
Second mistake, not implementing investment location (aka asset location) – Not to be confused with the previously discussed asset allocation, asset location is a tax-minimization strategy that takes advantage of placing different types of investments in the most appropriate account, as determined by the tax implications of that account type.
What does that mean? This means we determine which investments should be held in tax-deferred accounts (typically more conservative investments), which investments should be held in taxable accounts, and which investments will be held in tax-free or Roth accounts (which will typically be more growth-oriented investments). The aim is to optimize after-tax returns by placing specific investments in accounts where they can yield the most favorable tax outcomes. This can save tens, if not hundreds of thousands of dollars over a 15-30+ year retirement.
3. Not Having a Coordinated Income Strategy
Third mistake, no coordinated income strategy - It’s crucial to decide when and where to draw income from, especially concerning Social Security. Opting to defer Social Security can translate to receiving substantially larger payouts in the future, potentially equating to hundreds of thousands in additional income over your retirement years. We like to frame Social Security as insurance in case you live too long - a good problem to have, right? Especially if you have good health on your side.
You’ll also want to ensure you are withdrawing funds from the proper account type at the proper time. Just like how we discussed that there can be significant tax savings implementing “asset location”, the proper timing of withdrawal, from the same three account types, pre-tax, taxable and tax-free accounts, can be crucial for saving taxes. Because your tax rate in retirement is going to be determined by where you get your income from.
4. Not Taking Advantage of Your "Gap Years"
Fourth mistake, not taking advantage of low income “gap years” between retirement and RMDs – You need to make intentional moves to smooth out and lower lifetime tax liabilities in these years. Strategic Roth Conversions, which, when coordinated correctly, can save substantial dollars over time. A strategic approach can lead to paying significantly less in taxes, potentially saving you hundreds of thousands, if not millions of dollars, over your retirement.
5. No Proper Estate Plan
Fifth and final mistake, no estate planning - This is often misunderstood or overlooked because no one likes to think about their own mortality. But, it's not solely about drafting documents, it’s about minimizing taxes, establishing control after you’ve passed, and safeguarding your assets. Proper estate planning, coupled with solid execution, is meant to shield your assets from unforeseen legal liabilities that could potentially save not just hundreds of thousands, but millions of dollars for your heirs.
And perhaps the biggest reason to ensure you have your estate in order, is to prohibit heirs from fighting, or from having grudges or any misunderstandings. Ensuring what you have goes where you want it to, and to whom you want it to go, will significantly reduce legacy battles. Unfortunately, if estate planning isn’t in place, this can rip families apart.
In summary: These five costly mistakes – which again are: emotionally changing investment allocation, not implementing investment location, not having a coordinated income strategy, not taking advantage of your “gap years,” and no proper estate plan, can lead to a significant reduction in the quality of your retirement.
The goal is to coordinate all of these aspects into a solid plan, and compound good decisions year after year, then make needed adjustments as you go, and then the cumulative effects will provide a more secure financial future for you and the legacy you leave behind.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation.