If you’re like many people, you are planning carefully and saving diligently for a financially secure retirement one day. But all of your carefully laid plans could be upended if you make critical retirement planning mistakes at key junctures.
Here are 5 common retirement planning mistakes and how you can avoid them:
1. Claiming Social Security benefits too early — There’s a lot of flexibility in terms of when you can start claiming Social Security retirement benefits. You can file for Social Security as early as age 62 or as late as age 70. The earlier you file, the less money you’ll receive in benefits each month for as long as you collect Social Security, while the later you file, the more money you’ll receive each month.
Filing at age 62 will result in a monthly benefit reduction of about 8% compared to waiting until you reach full retirement age, which is between 65 and 67, depending on when you were born. You may be able to maximize your retirement income by waiting as long as possible to start collecting Social Security benefits.
Even if you retire before you reach your full retirement age, try to wait until at least this time to start collecting Social Security if you can pay your living expenses using other funds. You’ll receive the highest monthly benefit by waiting until you turn 70 to file — at this time, you’ll receive delayed retirement credits that equal about 8% annually.
2. Underestimating healthcare costs in retirement — If you think that Medicare is going to cover all of your healthcare costs after you retire, think again. Medicare features monthly premiums and co-pays that you’ll be responsible for. You might choose to purchase a supplemental Medicare (or Medigap) policy or a Medicare Advantage plan to cover some of your out-of-pocket medical expenses in retirement, but there’s a cost associated with these.
The Employee Benefits Research Institute (EBRI) estimates that a 65-year-old couple will need $265,000 to cover their total healthcare costs in retirement. Meanwhile, the Boston College Center for Retirement Research estimates that a 65-year-old couple will spend $197,000 to pay for healthcare in retirement. Neither of these estimates includes the cost of long-term care.
As you think about your retirement expenses, don’t forget to factor healthcare costs into your budget. Otherwise, your retirement savings might not last as long as you think they will.
3. Not considering longevity risk — With average life expectancy in the U.S. on the rise, it’s conceivable that retirement could last 20 to 30 years or even longer. The Social Security Administration has projected that a 65-year-old today can expect to live another 19 to 21.5 years, on average, and that up to one-third of current 65-year-olds will live to age 90, while one in seven will live to see their 95th birthday.
A longer retirement means that retirement savings may have to last longer than originally planned. To help stretch your savings out longer, consider waiting as long as possible to start tapping your retirement accounts, withdrawing less money each year and investing your nest egg more aggressively even after you enter retirement. Many retirees have traditionally moved their savings into low-risk but low-growth investments like bonds and cash, but you might need to assume a little more risk by retaining an equity component in your portfolio.
4. Not paying down debt before retiring — Carrying a heavy debt load into retirement can severely limit your financial flexibility during this stage of your life. The less money you owe to creditors after you retire, the more you can devote your retirement savings and other income sources like Social Security to meeting your living expenses and enjoying your golden years.
Make it a goal to pay down as much consumer debt as possible before entering retirement, especially high-interest credit card debt. Some people also strive to pay off their home mortgages before they retire — doing so can eliminate what is the largest monthly expense for most people, providing a greater degree of financial flexibility.
5. Putting saving for college ahead of saving for retirement — These are both important long-term financial goals for many families. But if forced to choose one over the other, it’s usually smart to prioritize retirement savings over college savings.
Here’s why: There are many options available to pay for college other than savings, such as loans, scholarships and grants. But no options like these exist for funding your retirement — it’s up to you to ensure your retirement financial security. There are also lots of things you can do to reduce college costs, like having your kids attend a local community college and live at home, at least for the first couple of years.
Give us a call if you have more questions about retirement planning and how you can avoid these and other common retirement planning mistakes.