5 Pre-Retirement Blunders Even Retirement-Savvy Investors Make

It sure can feel good to be in the homestretch toward retirement. But retired life is a different ballgame than the years we spent working and accumulating wealth. People are living longer, and this increases the risk of outliving our money – not to mention other challenges that can put our goals at jeopardy.   

While there’s no such thing as a fail-safe strategy, it definitely helps to have a retirement financial plan for ever-evolving economic conditions. Knowing what to do to plan is certainly part of that. But it’s just as important to understand what not to do. Otherwise inferior decisions could negatively affect your retirement lifestyle for many years to come.

Here are five potential missteps you should strive to avoid as you look ahead to retirement.

5 Common Pre-Retirement Mistakes

1. Drawing on retirement savings early.  It can tempting to make withdrawals from your retirement accounts before you retire. This is especially true when money is tight in other areas. But taking money from your IRA or 401(k) may prove costly in a number of ways.

If you are younger than age 59.5, not only might you have to pay income taxes on any retirement account withdrawals — you may be looking at an additional 10% penalty as well. Some 401(k) plans come with hardship provisions for withdrawals, but not all employers permit them. 

Even if you are past 59.5, taking money now will diminish the funds you can use for income later on. Just like for other Americans, it’s likely that your retirement accounts will serve as a major faucet of your future income streams. This trade-off involves more than just losing current savings, too. Every withdrawal takes investment dollars out of your retirement accounts that could otherwise grow with rising markets.

So, you may want to think about leaving aside early withdrawals as much as possible. This is important especially as increasing lifespans elevate the risk of outliving retirement money.

2. Not discussing retirement goals and expectations with your partner. Ask 100 financial professionals about the most common retirement mistakes they see with couples. Chances are they will mention a lack of dialogue about retirement expectations. Everyone likes to spend their time in different ways, and committed partners aren’t any different. Even so, it’s not unusual for one partner to assume their lifestyle expectations match those of their partner when they don’t.

This is an important issue for many financial reasons, including budgeting, income, and tax purposes. A few areas where partners’ retirement visions may diverge include:

• Having different patterns of spending
• The timing of when individual spouses actually prefer to retire
• Personal hobbies or activities they enjoy doing
• Future housing expectations
• Ideas of where they will live
• Goals for traveling and how they might do so
• Competing financial goals: Paying off debt, keeping living expenses low, helping loved ones with college or expenses, etc.
• Having different attitudes toward budgeting
• Overall lifestyle preferences and expectations

One spouse may prefer to work part-time while the other wants a break from work. Couples can also differ in travel plans. One of them may want to travel nationwide in an RV and the other desires to visit far-flung destinations overseas. These are just a handful of ways people may hold different lifestyle goals. It’s important for them to be on the same page, especially as physical challenges arise with aging. 

Framing lifestyle expectations will then help you to frame your retirement income needs and how you will cover them. There may be tax implications to your retirement visions, too. Different workplace retirement dates can mean one of you will start drawing on your retirement accounts. Those withdrawals will be taxed as ordinary income, and Social Security benefits may be tax-affected too. This shows the importance of having an open, honest conversation about your retirement lifestyle views.

3. Not thinking through a careful Social Security claiming strategy. Sure, you can take Social Security benefits starting at age 62. But doing so may mean that your benefit payments will be permanently slashed. Financial professionals say that, generally speaking, the breakeven age for claiming Social Security at later ages, versus 62, is in the early 80s. Should you have a family history and other indicators of a potentially long life, it may make sense to hold off on claiming benefits until later on. Waiting past full retirement age builds up “delayed credits,” which simply means your benefits accrue in value.

For people with partners, the Social Security question can be even more complex. Before the repeal of “file and suspend,” couples had well over 500 potential claiming strategies. Claiming benefits at the wrong time could potentially lead to tens of thousands of dollars in lost benefit payments. It’s prudent to work with a financial professional who can help you identify claiming strategies that are right for you.

4. Assuming your current advisor is the best guide for you in retirement planning. Up until this point, you may have worked with a financial advisor for your wealth-building and accumulation goals. They may have helped you build a nice nest egg. Because of their long-standing business relationship and history, it’s not uncommon for investors to believe their current financial professional should be their retirement guide.

However, retirement planning is different from other financial planning. For one, it concerns distribution and related issues: making decisions about retirement account withdrawals, monthly spending and income needs, and month-to-month cash-flow resources. If a bulk of your retirement money is coming from tax-deferred accounts, now you’ll be paying taxes on the backend. A financial professional specializing in the accumulation phase of financial life may not be the best qualified to balance and plan for all these post-retirement challenges.

As you enter this stage, you may want to consider financial firms with a retirement planning focus. With a distinct background in retirement planning issues, they can help you make the most of your money for your lifestyle goals.

5. Not having a survivorship plan in place. It’s an uncomfortable topic, but near-retirement couples should have a survivorship plan in place. After all, unexpected things can happen at any point, and what could happen if one partner passed away? It’s also not unusual for one partner to handle the bulk of household finances, which makes having a survivorship plan all the more important. 

An experienced financial professional can help you and your significant other develop survivorship contingency plans. That includes strategies for the surviving partner to have as efficient a financial transition as possible, to cover their income needs, and to prepare for when their money management abilities decline with aging. From the perspective of being practical, it’s better to start preparing now than later.  

Final Thoughts

Avoiding pre-retirement missteps like these begins with careful planning. You may find it helpful to seek guidance from someone who understands pre-retirement needs, goals, and can help you prepare for a retirement transition. If you are ready for personal guidance, financial professionals at SafeMoney.com are ready to help you.

Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.