5 Pre-Retirement Blunders Even Retirement-Savvy Investors Make

As you get closer to retirement, you want to make sure that you keep your principal safe, and that you have a good solid income plan in place so that you can comfortably pay your living expenses.

But unfortunately, there are some common blunders that people make that could end up throwing your retirement off track. So, it is important to understand what these mistakes are, and how you can avoid making them. 

 

5 Biggest Mistakes Made Before Retirement

Even if you have been a good saver all of your life, you still could be making some mistakes as you get closer to retirement. The most common pre-retirement blunders that even retirement savvy investors make include:

  1. Withdrawing money too early from retirement plan(s).
  2. Not discussing – and coordinating – retirement goals with a spouse or partner.
  3. Not maximizing Social Security benefits.
  4. Using the same financial advisor who helped you to grow your assets.
  5. Not planning for the unexpected.

 

Withdrawing Money Too Early from Retirement Plans

For many people, the money that is in their retirement plan(s) is their most valuable asset. So, it can make sense to consider using these funds for various needs – even if those needs are not related to your retirement income.

But accessing money too early from retirement plans can be costly. One reason for this is because you will likely owe taxes on some – or even all – of your withdrawals. Plus, the amount of tax could be substantial. 

Even though income tax rates are currently considered low, no one knows what these rates will be in the future. We do know, however, that the top federal income tax rate has been more than 70% forty-nine times in the past 107 years. 

 

Top Federal Income Tax Rates 1913 – 2020

Year

Rate

Year

Rate

2018-2020

37

1950

84.36

2013-2017

39.6

1948-1949

82.13

2003-2012

35

1946-1947

86.45

2002

38.6

1944-1945

94

2001

39.1

1942-1943

88

1993-2000

39.6

1941

81

1991-1992

31

1940

81.1

1988-1990

28

1936-1939

79

1987

38.5

1932-1935

63

1982-1986

50

1930-1931

25

1981

69.125

1929

24

1971-1980

70

1925-1928

25

1970

71.75

1924

46

1969

77

1923

43.5

1968

75.25

1922

58

1965-1967

70

1919-1921

73

1964

77

1918

77

1954-1963

91

1917

67

1952-1953

92

1916

15

1951

91

1913-1915

7

Source: Inside Gov (http://federal-tax-rates.insidegov.com/)

 

In addition to being taxed on your withdrawals, you could also incur an additional 10% “early withdrawal” penalty from the IRS if you do so before you turn age 59 ½. Plus, depending on the type of investments you have, there may also be an early withdrawal penalty.

For instance, if you take money out of most bonds and CDs (certificates of deposit) before the maturity date, you will likely have to face an early withdrawal penalty. Likewise, most annuities will also impose a surrender charge if you withdraw all of the money and “surrender” the contract, or even if you take out more than a certain amount each year. (In many cases, you are allowed to access up to 10% per year penalty-free, even during the surrender period). 

On top of all that, there are other financially harmful effects that could be faced. For instance, if money is withdrawn from an IRA or qualified employer-sponsored retirement account, you will lose any future tax-deferred gains on the money you take out. Over time, this lost return could be substantial.  

So, unless it is a last resort, it is not advisable that you access money from your retirement account(s) until you can at least avoid any of the early withdrawal or surrender penalties that you could face. 

 

Not Discussing – and Coordinating – Retirement Goals with a Spouse or Partner

If you have a spouse or partner, it is essential that you include him or her in your retirement planning. That way, you can both work towards a similar goal. In some cases, two people may have very different spending and saving habits – which can make planning for short- and long-term financial objectives difficult. 

Working with a retirement income planning professional can help you to develop viable strategies for coordinating your plan. He or she can also assist you in other areas, too, such as the timing of when you retire, along with estimated future expenses, and tax reduction or elimination. 

 

Not Maximizing Social Security Benefits

While most people are aware that they will have Social Security retirement income in the future, what many do not realize is that there are multiple ways you can access this income – and not maximizing these benefits could end up costing 5- or even 6-figures in lost income over time. 

Qualified Social Security recipients can file for this income as early as age 62. But accessing Social Security any time before your full retirement age will permanently reduce the dollar amount of your benefit.

 

Social Security Full Retirement Age

Year of Birth

Minimum Retirement Age for Full Benefits

1937 or Before

65

1938

65 + 2 months

1939

65 + 4 months

1940

65 + 6 months

1941

65 + 8 months

1942

65 + 10 months

1943 to 1954

66

1955

66 + 2 months

1956

66 + 4 months

1957

66 + 6 months

1958

66 + 8 months

1959

66 + 10 months

1960 or Later

67

Source: Social Security Administration

 

The amount of the reduction in Social Security benefits will depend on your age when you file and your full retirement age. So, based on just how early you start receiving Social Security, your benefit could be reduced as much as 30%. 

 

Cost of Taking Social Security Income Before Your Full Retirement Age

Age

Full Retirement Age 66

Full Retirement Age 67

62

25% reduction

30% reduction

63

20% reduction

25% reduction

64

13.3% reduction

20% reduction

65

6.7% reduction

13.3% reduction

66

Full Benefits

6.7% reduction

67

 

Full Benefits

 

On the other hand, if you wait until after your full retirement age to claim Social Security, you could increase your benefits going forward. For instance, each year that you delay can result in an 8% rise in the dollar amount of your income from Social Security. 

So, based on your full retirement age and the time that you file, you could see as much as a 32% increase in the dollar amount. As an example, if your full retirement age for Social Security is 66, and your benefit amount at that time is $2,000 per month, you could increase your benefit to $2,640 by waiting until age 70 to collect. 

 

If you take benefits at age:

Monthly benefit amount:

66

$2,000

67

$2,160

68

$2,320

69

$2,480

70

$2,640

(This example uses simple increases of 8% per year, based on an original dollar amount of benefit of $2,000. It does not factor in any cost-of-living-adjustment, or COLA, that the benefit recipient may be eligible for). 

 

Some other items to consider when you file for Social Security include whether or not your spouse is also eligible, as well as any of the other retirement income streams that you may have. 

 

Not Planning Ahead for the Unexpected

Although nobody likes to think about it, the reality is that accidents and illnesses can – and do – occur…and when they do, it is best to already have a plan in place. For instance, if you are unable to work for a while due to a disability, you may have to dip into your savings to pay the bills. 

Likewise, the need for long-term care can be extremely costly. On average, the monthly price tag for a semi-private room in a skilled nursing facility can be over $7,500. But, long-term care coverage and a disability insurance plan can help you to keep your savings and assets in place for their intended purpose.

The same holds true with life insurance protection. The funds from a policy can help your survivors move forward, but without having to struggle financially if your income is replaced with these funds. 

 

Using the Same Financial Advisor Who Helped You to Grow Your Assets

While it may sound strange, using a financial advisor who helped you to grow your savings and investments may not necessarily be the same person you should work with on your retirement income planning.

This is because converting assets into a reliable, ongoing income stream takes a different strategy. So, if you need advice regarding how you can turn your savings into a lifetime retirement income, talking with a specialist in this area of planning is a must.

If you would like more information on how to set up a retirement income stream, as well as on how you can reduce the chances of making a mistake in your overall planning strategy, please feel free to contact us. 

 

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