By Deborah Jeanne Sergeant
Retiring in a few years? You can improve your financial situation by avoiding these common financial mistakes many people make.
1. Too little funds.
Rather than relying on Social Security and chance, future retirees need to plan on saving enough.
“As hard as it might be, saving to a retirement plan should be done consistently over time to allow for a sufficient amount in retirement,” said Diana Apostolova, investment consultant with Rochester Investments.
2. Paying off the house.
“Many people incorrectly rush to pay off their mortgages thinking that it’s a good idea to do so before they retire. This is a mistake because the interest rates on their current mortgages is generally lower than what they can earn on their investments,” Apostalova said.
3. Forgetting about inflation.
The cost of goods and services will only go up.
“Many people stay retired for 20-plus years, but the amount needed in 20 years will be significantly higher than what is needed today,” Apostalova said.
Work with your financial adviser to decide how much you will need. You may need more money than you thought.
4. Not establishing a spending plan.
Especially right after retiring, it is tempting to make some major purchases or spend on hobbies you were unable to do while working.
“Rushing into spending can hurt someone really badly if they end up living longer than they initially anticipated,” Apostalova said. “It’s not going to be easy to be in your 90s and live on a much lower income than your standard of living. Pacing yourself is critical and can be a really big problem for some that didn’t have a solid retirement plan in place and a plan that wasn’t updated on a regular basis.”
5. Forgetting about healthcare expenses.
These expenses will not only increase with inflation but will also escalate as your healthcare needs increase with older age. Lizz Ortolanti, president and owner of Ortolani Services, Inc. in Rochester, is licensed in life, accident and health insurance and certified in Medicare.
“Pair a health savings account (HAS) with a high deductible plan,” Ortolanti said. “Some plan with an HSA to pay for these expenses pre-tax, which is nice. It’s also a retirement savings tool.”
HSA funds may be rolled over into another savings vehicle once the plan holder retires.
“Over time, you can have $10,000 to $20,000 by age 65 in an HSA,” Ortolanti said. “That is a nice tool for planning. HSA money is a pre-tax in and pre-tax out.”
6. Skipping long-term care planning.
Nursing home care costs hundreds per day. Since most people who need nursing home care will likely need many months of care, it is important to plan for this expense.
Ortolanti suggested both long-term care insurance with a critical illness rider. The latter can augment or replace the former.
“Medicare does not cover long-term care,” Ortolanti said. “The only insurance that covers it is Medicaid or long-term care insurance. Work with your financial planner; Medicaid has asset requirements. You may need to spend down assets to qualify.”
7. Going only with a Roth.
While it may serve many situations well, a Roth IRA is not the only savings vehicle for retirement.
“They have to understand that if they put the money into a traditional retirement plan, not a Roth, they save 25% on taxes if they’re in that tax bracket,” said Jeff Feldman Jeff Feldman, Ph.D., and certified financial planner with Rochester Financial Services in Pittsford. “For most people, I recommend a traditional IRA plan instead of a Roth. With a Roth, they don’t get the tax savings.”
8. Avoiding all risk.
The best way to grow money is to invest it; however, with investment comes risk. No- or low-risk investments will not grow as quickly. For people with many years left before retirement, including some risk can help them more rapidly increase their retirement savings.
“I’ve heard of some people who look at the volatility and say, ‘I won’t put that as part of my plan,’” Feldman said. “They use a savings account. They miss the big point. Putting money into your retirement plan saves on taxes. You don’t need to put it into aggressive stock funds and still get a savings on taxes. If you put $10,000 into a bond fund, it costs you only $7,500 because you don’t pay taxes on it. For the tax savings alone, it’s worthwhile investment.”
9. Putting the eggs in one basket.
Financial investment thrives on diversity. Feldman said that a balanced portfolio should include different stock funds and some fixed income.
“As you get closer to retirement, you want to keep an eye on volatility and reduce risk,” he said.