7 COSTLY MISTAKES MOST RETIREES MAKE

A MOTLEY FOOL SPECIAL REPORT

7 COSTLY MISTAKES MOST RETIREES MAKE

AFTER A LIFETIME OF SAVING, YOU CAN'T AFFORD TO MAKE

THESE COSTLY MISSTEPS

The Motley Fool

May 2015

7 Costly Mistakes Most Retirees Make

After a lifetime of saving, you can't afford to make these costly missteps

Dear Fool,

The reward for being diligent about saving for retirement is knowing that you have the financial security to make your retired years the best ones of your lifetime. Yet after working so hard to build up a retirement nest egg, too many retirees make simple yet costly mistakes that can wipe out your life savings much more quickly than you'd think possible. Fortunately, you can avoid these mistakes and take steps to ensure that you'll have enough money to last throughout retirement. Let's take a closer look at seven of the most common mistakes retirees make.

Dan Caplinger

MISTAKE #1: STAYING OUT OF THE STOCK MARKET.

Most financial advisors will tell you that as you get older, it makes sense to be more conservative with your portfolio, as you generally are closer to reaching your financial goals don't have as much time to recover from stock-market downturns as you did earlier in your career. But many retirees take this advice way too far, selling off all of their stocks in their portfolio and relying entirely on "safer" investments like bonds and bank CDs.

In the past, when you could get 5%, 6%, or even 7% on risk-free Treasury bonds and FDIC-insured bank moneymarket accounts, it was possible to generate enough income to live on with this method. Now, though, you'll find plenty of bonds and CDs paying 1% or less, making it impossible for a retiree to make ends meet.

Rather than getting out of stocks entirely, it pays to keep a portion of your retirement savings in stocks even after you retire. Dividend-paying stocks can provide income, while growth-oriented stocks can help your portfolio grow. Remember that with a retirement that could last 30 years or more if you're lucky, most people will need their money to keep working for them in order to make it last.

MISTAKE #2: SPENDING TOO MUCH FROM YOUR RETIREMENT SAVINGS.

It's easy to feel when you've just retired that you deserve to splurge a bit. Yet it can take a while to get used to not bringing home a paycheck, and depleting your savings too quickly in the first year or two of retirement can force you to reduce future spending a lot more than you might think.

2 A Motley Fool Special Report

Although it isn't a perfect guideline to follow, the 4% rule is one that many people use as a rough estimate of how much they should spend from their retirement nest egg each year. By taking your total retirement savings and multiplying it by 4%, you'll get an idea of how much you can afford to spend annually, with a reasonable expectation that barring unusual market performance, your savings will outlive you. By contrast, if you spend 6%, 7%, or even more of your total nest egg each year, you'll have trouble making your money last long enough to support you throughout your retirement.

MISTAKE #3: TAKING SOCIAL SECURITY AT THE WRONG TIME. Apart from your retirement savings, Social Security is the biggest financial support for most retirees. The stability of a monthly income that will last as long as you live and provide for your surviving spouse is extremely attractive and hard to duplicate by other means.

Yet timing Social Security is important. The longer you wait before you claim, the larger your monthly checks will be, but you also have to weigh the lost checks you'll never get if you wait. When you claim will also affect how much in survivors benefits a spouse will receive, so it's not always enough simply to run the math against your own life expectancy alone. Some people claim too early, while others miss out on strategies like claiming spousal benefits while leaving your own retirement benefit to grow until later in your retired years. Only by understanding the ins and outs of Social Security will you make the most of the program.



MISTAKE #4: NEGLECTING THE TAX CONSEQUENCES OF RETIREMENT ACCOUNTS.

Retirement accounts like IRAs and 401(k)s are a great way to save because they offer tax-deferred growth. But after you retire, the IRS will want its share of that money, and too many retirees forget to incorporate the need to pay taxes on withdrawals from traditional IRAs and 401(k) accounts into their financial planning.

One trap that many retirees fall into involves neglecting to consider taxes until the tax bill comes due. In order to pay the IRS, you might even have to withdraw more money from a retirement account, in turn creating a vicious circle in which those extra withdrawals generate even more tax liability.

To manage your taxes, it's best to have a variety of sources to draw from in retirement. Roth IRAs offer tax-free income, while even regular taxable accounts can sometimes let you take advantage of lower rates on dividend income and long-term capital gains. By balancing your cash withdrawals across different account types, you can minimize your tax burden and make it more manageable.

MISTAKE #5: HAVING TOO MUCH MONEY TIED IN A HOME.

Many retirees have owned their homes long enough to have paid off their mortgages, which is a good thing in the sense that it avoids having to cover debt when you don't have as much income to make monthly payments. Yet when you have a lot of equity in a home that's larger than you need, which is the situation many retirees face, it can be difficult to get access to the cash locked in your home.

Financial products like reverse mortgages or home equity lines of credit can help retirees get access to the money they have invested in their homes, but they each have shortcomings that you should be aware of before choosing them. Another alternative that works for many retirees is to downsize by selling the family home in favor of more modest accommodations, especially if you had children who have since moved away and therefore no longer need the number of extra bedrooms your current residence has. With the housing market having recovered from the financial crisis, selling an existing home is now a good option again if you're comfortable changing quarters in retirement.

MISTAKE #6: HAVING AN INADEQUATE ESTATE PLAN.

Many retirees do a stellar job of preparing for their own financial needs but give little thought to what will happen to their money after they die. It's important to put your affairs in order early in retirement, especially if you have loved ones whom you want to benefit from your wealth if you pass away unexpectedly.

3 A Motley Fool Special Report

At the very least, having a will, powers of attorney for financial and healthcare decisions, and an advance directive for critical end-of-life medical decisions will both ensure that the people you choose are authorized to take action on your behalf so that your wishes will be honored. For certain family situations, additional moves like creating a trust can be even more useful in protecting your hard-earned assets from jeopardy. Ideally, you'll feel comfortable in sharing your wishes with family members and other heirs, allowing you to resolve any problems that may arise and guaranteeing a smooth transition after your death. It may seem like extra effort, but having a solid estate plan can save your family a lot of heartache after your death.

MISTAKE #7: PANICKING IN A MARKET DOWNTURN. Even those retirees who are wise enough to keep some stock exposure in their portfolios can be prone to panic when the stock market starts to fall. That's a normal emotional reaction given the importance of preserving your retirement nest egg, but it's also typically the wrong move. All too often, panic-selling after a downturn only succeeds in locking in a loss and missing a following rebound in share prices. Moreover, once you sell, it can be nearly impossible to figure out when the right time is to get back into the stocks you've sold -- especially if you turned out to be wrong and you'll have to pay more to replace the shares than you received when you sold them. The better course is to ride out inevitable downturns and to have the confidence that good companies will perform well over the long haul. Many retirees make mistakes with their money. Knowing the danger, though, will help you avoid the worst pitfalls and improve your chances of having a long and prosperous retirement.



 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download