Top 3 Financial Mistakes Retirees and Pre-Retirees Make

Jerry Linebaugh - PhotoBy Jerry Linebaugh

Not Creating a Budget

In my practice this seems to surface as the single most common mistake I see people of all income classes make.  This stems largely from a lack of conversation with their financial advisor.  Either the current advisor is requesting a meeting that the retiree keeps ignoring or the meetings are occurring with no one talking about real budgeting. 

Your budget needs to amortize quarterly or annual things like taxes or insurance into a monthly factor and be placed into your regular monthly budget.  Things are different when you finally step into your lifeboat (your retirement). If you will soon be or are now retired, every day can seem like Saturday.  If your days are no longer occupied by what you used to do for work and you find yourself at home then this presents new ways to spend money since you now seemingly have the time. 

Without declaring a budget, some years in advance you may be in for a rude awakening where you draw too much money from your nest egg to make up for your shortfalls. If you are doing this consistently your extra withdrawals can affect your long term security.

Staying Focused on Accumulation after Retirement

With so much of the marketplace advertising aggressively and constantly saying, “BUILD! BUILD! BUILD! it can be difficult for many people to see things through to change their investment attitude from that which was geared to accumulation to that of a strategy of income.  Many retirees I sit down with say they are now conservative and cannot stomach that level of risk that they were taking at one time or they confess they need to change their risk allocation. 

But when they take a closer look at how these products work, they see that for many of them, they hold little to nothing for income planning.  Now there are aggressive, moderate, and conservative income portfolios but you need to seek out how income portfolios work and how they are different from accumulation portfolios.  Many see that they are not holding anything good for income sake that could take them through a long retirement.  Many others aren’t even being asked by their advisor about changing their portfolio to look more like it should for income sake.

The attitude sometimes is, “Well, the market is up right?”…or, “I made my money back from the losses years ago, can’t we just deal with it when the market gets bad?”  If you are retiring soon or already retired, it is not enough to talk about whether you are conservative or moderate or aggressive or in between.  You must also have a conversation about how income products work and how they can serve you before the next downturn in the market occurs.

Lack of a Distribution Strategy that Accommodates Their Tax Bracket

In my experience I have had clients come to me that have made some enormous mistakes that have drastically affected their independence longevity because their retirement plan lacked a distribution strategy. The first thing that needs to be reviewed is social security income. Even if this isn’t something you plan on drawing on until later in retirement, it is something that needs to be considered first. (Not to get off track here but social security checks are 32% higher at 70 than at 62.) For most people, under the current rules, the money that gets thrown into the income tax bracket system on social security is only about half of your actual social security income.

Let’s agree that just because you receive taxable income cash flows does not mean you must pay taxes.  Whether social security is taxable or whether any of your other taxable incomes will in fact incur taxes is determined by the total of the taxable amounts on a yearly basis.  Some people will not have taxes to pay and there are plenty of others that will pay quite a lot in taxes possibly at the same rates they were when they were working. You have certain assets you may draw cash flow from that are not “income” taxable, just to name a few—rental income, assets that you will sell or liquidate—these could be “capital gains” taxable. 

Then there are others that will be income taxable or have the potential to be income taxable and those are assets like pensions, payments or income from many annuities, IRA and 401K distributions and many other similar plans. Lastly there are non-income taxable assets like municipal bonds, Roth IRA withdrawals and certain cash flows from arbitrage created with properly structured loans from certain types of life insurance that are not going to contribute to your taxable income base at all.  Now you want to seek out tax advice from qualified persons before nailing down your plan but working with a firm that has in-house or strategic partnerships with a CPA and other specialists can go a long way in developing your distribution strategy that accommodates the tax man so your lifestyle and withdrawal rate is sustainable after taxes.  This does not take long to calculate with the right people and the right tools.  

Once you see this in writing it can make more sense.  It’s worth repeating that some of your holdings will be taxable and others will not contribute to the tax equation at all.  Also don’t limit yourself into thinking you must only take from taxable accounts first or vice versa.  Sitting down with a tax advisor in the same room as your retirement advisor might reveal that you should take from both types in some manor instead of emptying one before drawing on the other, but not always. 

There are many mistakes that retirees make when it comes to retirement but, don’t let one of these situations be one of them.  Having a conversation about these will bring out many other pitfalls that may not have been considered. Seek out advisors with the capacity to have your plan reviewed with several experts they work with either in-house or by strategic partnerships.  It’s like having all of your doctors at one table–it’s not common for sure.  But to achieve an uncommon retirement you need an uncommon solution.

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