Avoid the Most Common Retirement Mistakes

Retirement is undeniably a major life and financial transition. Although you may feel as though you’ve thought of everything, it’s important you don’t grow nonchalant about some of the financial challenges that retirement poses, for not all are immediately obvious. In looking forward to your “second act,” here are the top 5 most often overlooked matters that a retirement strategy needs to address.

 

1. RMDs

The Internal Revenue Service directs seniors to withdraw money from qualified retirement accounts after age 72. This class of accounts includes traditional IRAs and employer-sponsored retirement plans. These drawdowns are officially termed Required Minimum Distributions (RMDs).¹ It is often easy to overlook an RMD in a long-forgotten retirement account, and the penalty for missing an RMD can be up to 50%. Consider consolidating your various retirement accounts into one to make it easier to manage your RMDs.

2. Taxes

Speaking of RMDs, the income from an RMD is fully taxable and cannot be rolled over into a Roth IRA. The income is certainly a plus, but it may also send a retiree into a higher income tax bracket for the year.1 Retirement does not necessarily imply reduced taxes. While people may earn less in retirement than they once did, many forms of income are taxable: RMDs; investment income and dividends; most pensions; even a portion of Social Security income depending on a taxpayer’s total income and filing status. Of course, once a mortgage is paid off, a retiree loses the chance to take the significant mortgage interest deduction.²

3. Healthcare Costs

Those who retire in reasonably good health may not be inclined to think about the possibility of experiencing a healthcare crisis, but these things are unpredictable and could occur sooner rather than later – and they could be costly. A report by HealthView Services found that even with additional insurance coverages such as Medicare Part D, Medigap, and dental insurance, a healthy 65-year-old couple can expect to pay almost $208,000 on average out-of-pocket over their lifetime for their healthcare expenses.³ It’s important to note that this number could be even higher with the costs of healthcare rising in general.

4. Long-Term and End-of-Life Care

Those who live longer, or face certain health complications, will probably need some form of long-term care in the future. One month’s stay in a private room in a nursing home costs an average of $9,000 nationally, so it’s important to consider these costs when preparing for retirement. Long-term care insurance is cheaper, and generally easier to obtain, the younger you begin the coverage.⁴ One other end-of-life expense many retirees overlook: funeral and burial costs. Pre-arranging your funeral and even pre-paying for your funeral expenses can lower costs and ease the burden on your surviving family members.

5. Rising Consumer Prices

Historically, healthcare costs inflation has risen between 1.5-2 times the Consumer Price Index. For a 65-year-old couple, this equates to an additional projected $85,917 in lifetime retirement healthcare costs. Retirees would be wise to invest in a way that gives them the potential to keep up with increasing consumer costs.⁵ As part of your preparation for retirement, give these matters some thought. Enjoy the here and now but recognize the potential for these factors to impact your financial future. If you have questions about your unique situation, contact a Wealth Advisor today.