Individuals in their sixties often view the decade as consisting of two parts: the transition to retirement and retirement itself. While retirement may be marked by a specific date on the human resources calendar, it can involve several years of adjustment, as suggested by financial experts who offer advice on avoiding common financial mistakes in one’s sixties.
1. Not planning how they will spend their time in retirement
David Edmisten, CFP® and founder of Next Phase Financial Planning, LLC, emphasizes that retirement presents opportunities for individuals to discover or rediscover personal purposes beyond work.
“When people think about retirement planning, they often focus on numbers such as investment performance, market trends, savings adequacy, and financial sustainability,” says Edmisten. “While these are crucial considerations, little attention is given to matters of fulfillment.” Research indicates that having a sense of community and purpose is linked to longevity. Edmisten encourages individuals to dedicate more thought to how they will spend their time during retirement, as this also has financial implications.
For instance, if someone chooses to engage in consulting within their field post-retirement or take on part-time work in a different industry, their earnings may delay the need to access retirement funds, or conversely, lead to penalties if they resume Social Security benefits after rejoining the workforce. Moving to a region with a higher cost of living to be close to family or friends could accelerate the depletion of retirement savings, as could adopting an expensive hobby to fill the void left by work. Deliberating on living arrangements and leisure activities can aid in the emotional, physical, intellectual, and financial transition into retirement.
2. Not enjoying their leisure years
Emily Rassam, CFP® and Senior Financial Planner at Archer Investment Management, highlights a common tendency among many clients to avoid utilizing their retirement funds.
“Most individuals have spent years accumulating wealth,” she explains. “Transitioning to the stage where they need to start accessing these funds can be intimidating.” Fear of overspending or depleting savings prematurely often hinders people from indulging in travel, hobbies, or experiences they desire before declining health limits their capabilities. Rassam assists clients in identifying their optimal retirement savings figure to facilitate a more comfortable approach to spending.
3. Following blanket guidelines for retirement age
Decisions surrounding retirement age are often influenced by external factors such as Medicare eligibility at 65 or full Social Security benefits at 67 for those born post-1960. However, these default age markers may not align with everyone’s financial situation.
“Every individual has a unique financial position,” observes Rassum. “Some individuals could feasibly retire at 60, having worked beyond necessary retirement age due to societal expectations. Conversely, others may need to work beyond 65 or 67.” Rather than adhering to standard retirement age benchmarks, Rassum advises prospective retirees to collaborate with financial planners to determine an age that suits their circumstances best.
4. Believing everyone has the same “number” for retirement savings
While there are general guidelines dictating the ideal retirement savings amount, Rassum stresses that this figure is highly personalized. The essence of financial planning is to identify the specific sum necessary for meeting long-term expenses, healthcare needs, and personal aspirations.
5. Not having a diversified tax strategy
According to Edmisten, individuals nearing retirement often fail to account for the tax implications associated with withdrawing accumulated funds.
“Typically, individuals earn their highest incomes towards the end of their careers. Upon retirement, their earnings are likely to decrease significantly,” he notes. However, upon reaching 73, retirees are mandated to commence Required Minimum Distributions (RMDs) from their retirement accounts. The withdrawal amounts, determined by age and life expectancy, can trigger substantial tax liabilities and propel individuals into higher tax brackets. Consequently, many retirees find themselves allocating unexpected sums to tax payments, impeding their ability to enjoy their post-employment years.
To mitigate excessive tax burdens, Edmisten advises clients to diversify their investment portfolios across various tax brackets in the years preceding retirement. While most pre-tax funds are commonly housed in 401(k)s, he advises supplementing these savings with after-tax contributions to IRAs and taxable brokerage accounts that do not impose contribution restrictions or necessitate mandatory withdrawals at specific thresholds.
“Establishing these three distinct investment brackets before retirement affords individuals multiple options to draw funds from, enabling them to better manage their tax obligations,” he explains. Failing to strategize tax management ahead of retirement often compels individuals to realign or convert assets post-retirement.
6. Not accurately budgeting for giving
While charitable contributions and inheritance considerations are personal decisions, excessive generosity can strain retirement budgets if not managed judiciously.
“Prolonged, unchecked giving can disrupt yearly financial plans,” warns Edmisten. He advises clients to allocate funds for donations, whether dispersed during their lifetime (the IRS permits tax-free gifts totaling $18,000 annually) or earmarked for future inheritances. “Prioritize self-sustenance and essential expenses before extending generosity to others. It is imperative to strike a balance between charitable intentions and personal financial security to avoid undermining regular expenditures,” he emphasizes.
7. Not budgeting for medical expenses
While individuals aged 65 and above qualify for Medicare, supplementary insurance coverage is often required to offset costs not covered by primary plans, such as prescription medications and dental, vision, and auditory care. Out-of-pocket expenses must also be factored in. Given the escalating healthcare costs and age-related medical concerns, a typical 65-year-old couple retiring in 2023 may anticipate spending $315,000 on healthcare expenditures. Insufficient savings earmarked for medical contingencies can significantly impact retirement prospects.
8. Being too aggressive or too conservative with your investments
Retirees are poised to live two to three decades post-retirement, necessitating ongoing prudence in investment decisions. Rassam observes that some clients retain identical funds in their 401(k)s from thirty years prior, likely maintaining an excessively aggressive investment stance relative to their age. Conversely, other individuals adopt excessively conservative investment strategies.
“Several retirees either retain overly aggressive positions or shift entirely to low-risk investments which impede inflationary adaptations,” Rassam remarks. Striking a balance between inflation resilience and risk mitigation is crucial, with many achieving this equilibrium through a moderate investment approach. “A majority of retirees gravitate towards moderate portfolios, seeking to uphold inflationary defenses while alleviating risk and ensuring peace of mind, a top priority during retirement,” she concludes.
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