Retirement Mistakes Made by High Net-Worth Households – Part 2

Editor’s Note: This is Part 2 of a two-part series on common retirement planning mistakes made by high net-worth investors and households. For more information on the retirement and financial challenges awaiting today’s investors, request your personalized copy of The New Retirement Report. This resource spells out many of the risks awaiting you in retirement and potential solutions to address them.

In the first half of this two-part series we addressed key mistakes that can drain your wealth in retirement. From the high-ticket expenses of long-term care and healthcare to unaddressed asset protection or liability issues, there are many potential missteps. Here are a few more retirement mistakes to avoid.

Review them with your retirement planning professional or advisor to ensure your plan has strategies to address, or even avoid, these possible financial mishaps.

Other Retirement Mistakes by High Net-Worth Households

MISTAKE #4: Creating a huge tax time bomb by having too much money wrapped up in tax-deferred vehicles.

For households accustomed to living well and having healthy spendable income, too many funds in tax-advantaged accounts can mean heavy tax burdens.

Upon withdrawal, assets distributed from tax-deferred accounts are usually fully taxed as income. Also add to the mix the fact that there is a wildly varying range of different tax situations for investors, especially high net-worth households.

Some states have no income tax at all. Others may exept retirement income from taxation, and still yet, many states don’t count Social Security benefits at all in their taxable mix. For that matter, a number of states don’t tax pension income, and quite a few states exempt people of senior-age from property taxation.

While investors aged 65 and up get a higher standard deduction, this hodge-podge of tax scenarios can make retirement planning hard to navigate. And there is also the issue of required minimum distributions at 70.5, which can be a “wealth drainer” especially on qualified retirement accounts with high balances. All of this means that it’s important to plan well for potential tax burden issues at federal and state levels.

Addressing this question of a potential tax time bomb in your pre-retirement planning will help you avoid a retirement income tax problem. It will also help to manage unnecessary complications when it comes to your estate planning options.

ACTION: With guidance from qualified professionals in financial and tax planning, consider a plan to allocate funds to tax-diverse income sources, including after-tax retirement savings accounts like Roth IRAs. If you discern tax gaps in your plan, it may be worthwhile to consider sources that can offer tax-free income. For example, policy loans from a permanent life insurance policy can let you receive income on a tax-advantaged basis. 

MISTAKE #5: Not planning for expenses related to elderly parents.

Baby boomers face a new concern as Americans’ longevity increases — having to care for and potentially provide financial support to aging parents. 

According to TD Ameritrade, 25% of baby boomers already support another adult. Around 8% of those adults are aging parents. What’s more, 20% of Gen Xers also support other adults, with 13% being their parents. Most of this support went to general living expenses and medical bills, with financial supporters paying an average of $12,000 per year to help loved ones. 

Ideally, your parents will have sufficient insurance for retirement expenses – especially healthcare and long-term care. If not, you may want to see what can be done to get them coverage. Apart from long-term care insurance, there are new generations of life insurance that could help you pay for personal care needs. Some life insurance comes with living benefit riders, or benefits that let you accelerate the death benefit toward certain care expenses.

ACTION: Talk with your parents about their own financial plans…because they affect the future of yours. If your parents do have insurance, it’s important to confirm their policies are fully up-to-date. Do they have enough coverage? What do their policies cover? Will they and/or you be able to afford them in the future? These are critical questions for your and their financial peace of mind, now and in the future.

You might connect them with an experienced retirement professional. Expert advice will help your folks navigate their retirement plans, tax burden, debt, anticipated expenses and income, insurance, and other areas of financial planning.

MISTAKE #6: Not integrating an estate plan with a retirement plan.

A retirement plan is designed to help you enjoy your accumulated wealth over the rest of your life. An estate plan is designed to identify who gets what you leave behind.

While they may seem like sequential plans that don’t need to be integrated, there are important factors that need to be aligned. These include timing of income, timing of wealth and asset transfers, how assets are owned and registered, who is listed as beneficiaries, and potential tax burdens to avoid.

Retirement planning has a broad scope and should include your estate plan. Integral to an estate plan is a will or trust that instructs how to distribute your wealth. Without either document, your estate will be divided in probate court, a long and expensive process that could add stress and conflict when your loved ones need it least.

Retirement accounts are not dispersed through a will. They name account beneficiaries who will automatically receive access to the accounts upon your passing. Without naming a beneficiary to your retirement accounts, the accounts will go to probate court. 

The goals of an estate plan are to:

• Allow you to control your assets as long as you have the capacity to do so
• Protect you and your loved ones in the event you are incapacitated
• Distribute your assets according to your wishes

By contrast, your retirement plan should address these broader questions:

• Will you have sufficient assets to support your retirement lifestyle?
• With a growing likelihood that you may spend as many years in retirement as in your working life, will you have more than enough financial resources to support your long-term lifestyle goals?
• Are you prepared to meet any health care needs that may crop up after you retire?
• How will you spend your time after you leave the work world and what will that cost?
• What are your estate plan goals and how will you ensure they stay consistent with your retirement plan?

Many people avoid estate planning. According to a recent Caring.com survey, only 42 percent of U.S. adults currently have estate planning documents, such as a will.

ACTION: Meet with your financial professional to review your retirement plan and discuss putting an estate plan into place, if you don’t already have them. Many retirement-focused financial professionals have relationships with estate planning attorneys or legacy-planning professionals to help you facilitate your wishes.

Your financial professional can help you discover corresponding strategies and products to help you implement your estate goals. This may span alleviating the tax burden on your estate to your beneficiaries, leaving a legacy while freeing up more dollars for income, or passing wealth to heirs in the most tax-efficient manner possible.

Ready to Optimize Your Retirement Plan? 

Nothing ever goes completely according to plan. But if you are ready to build a rock-solid financial strategy, working with a retirement-knowledgeable financial professional can go a long ways toward your goals. Or should you want a secondary evaluation of your existing plan, a retirement guide can help you uncover steps to optimize your current strategy.

At SafeMoney.com, financial professionals stand ready to help you and offer no-obligation initial, goal-discovery consultations. Get started by visiting our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, please call us at 877.476.9723.