What do you do when you hear the dreaded question, “Are you prepared for retirement?”
If you’re like most people, you quickly change the subject, according to Phyllis Garratt, a certified financial planner with Meritas Wealth Management in Larkspur, California. “People are so fearful they don’t even want to think about it, but not doing anything is the worst mistake you can make.” Anxiety about retirement is at a record high, Garratt says, fueled by the setbacks most of us have experienced at the hands of a stalled-out economy.
Consider these facts: With only 15 percent of today’s employees entitled to a pension, compared with almost 40 percent in 1980, the vast majority of us will rely on a combination of Social Security and savings for our retirement. Yet savings are not only hard to come by, they’re also multiplying at much slower rates. The Standard & Poor 500 – a good indicator of the overall stock market – has returned just 4 percent over the past 10 years.
So what to do? Prepare, prepare, prepare if you have time, says Garratt – and make some fast, smart adjustments if you don’t. Here are the 10 biggest retirement mistakes, and how to avoid or fix them.
This comes as a big surprise to many retirees – they spend more, not less, in the first few years after retirement. “We call it deferred spending, or the ‘Whee, I’m free’ factor,” says retiree Ellen Gerson of Florida. “We see all these folks retire and start doing all the things they were dying to do, from traveling to golfing to fixing up their houses. A year or two later, they look over their budgets and they’ve gone way over.”
How to fix: Make a budget based on long-term planning, and stick to it. If possible, anticipate travel and other retirement-related expenses and build them into your budget. Then track your spending carefully to see which categories go up and which go down. Are you eating out more, or less? Look for ways to balance things out now that you have more free time. If new hobbies are costing you extra in supplies, for example, maybe you can eat out less and cut food costs. When Joe Peters of Indiana was looking to slash his retirement budget, it took him months to look in the garage. But when he did, he realized that the family’s second car looked awfully dusty. Downsizing cars and other vehicles can be an emotional issue, experts say, but it’s one of the quickest ways to get your retirement budget under control. Not only can you sell an extra vehicle for needed cash, but most people underestimate how much it’s costing in insurance, maintenance, and gas to keep more than one car – not to mention other vehicles, like RVs, motorcycles, boats, or snowmobiles.
Sometimes there’s a specific reason you’ve been hanging onto an extra car: “Our second car was the one with the roof rack,” Peters says. Adding a roof rack to the family’s main car, which got much better gas mileage, saved money at home and on trips.
How to fix: If you have a vehicle you don’t really need, sell it – or give it to a grandchild or charity and take the tax write-off – then put the proceeds, along with what you spend each month on gas, insurance, and repair costs, into savings. Use public transportation when you can, and consider walking or biking for the added health and fitness benefits. If you have a second vehicle you use only rarely, such as an RV or a four-wheel-drive vehicle, consider renting when necessary instead of owning.
“This one is huge,” reports retirement specialist Bill Losey, who points out that many people relocate based on a couple of specific factors, such as low real estate costs or low taxes, then discover that other costs more than eat up their savings.
“We’re seeing a surprising number of retirees who make an expensive move, then end up moving back after a few years, costing even more,” Losey says. Some retirees sell their homes and downsize, only to discover that much higher property taxes on their new, albeit smaller, home eat up their savings. Others move to an area where real estate costs are lower – but other costs, such as transportation and food, mount because, say, the new area requires more driving and has fewer shopping options. Choosing an area that’s pleasant for a couple but lonely for a single person can be tragic in the event of death or divorce. But perhaps the most common scenario is moving to a smaller town or more rural area in pursuit of lower expenses, only to find that lack of access to a major airport and medical center – and the need to travel for medical or family reasons – costs more than they saved.
How to fix: Before choosing a retirement area, investigate it carefully for hidden costs. Talk to retirees who live there: What do they wish they’d known before moving? Research property taxes, sales tax, the cost of groceries and other basics. Consider these factors:
Nearness and convenience of high-quality medical care, including the availability of specialists for common age-related conditions such as heart disease, cancer, and Alzheimer’s
Access to public transportation in case driving becomes difficult
Cost of travel to visit adult children and other family and friends
Ease of access to a major airport
A downtown area within walking distance that can provide a satisfying cultural and social life
Availability of senior services, such as adult day programs, subsidized transportation, and in-home care
A strong economy with potential employers should you change your mind and choose or need to work part-time
Discuss your decision carefully with family members, particularly adult children and aging parents. Are they counting on you to be involved grandparents or to help out if they get sick? Pay close attention to resale value, too; if you do make a mistake, can you sell easily? It’s rarely a good idea to make a major change without an easy out or backup plan. If a move doesn’t look like a relatively safe bet, consider a temporary move while renting out your current home or downsizing in place.
Call it the “it won’t happen to me” problem. When you’re healthy, it’s hard to imagine that someday you won’t be – yet it’s almost inevitable that you’ll encounter some type of serious health problem. According to a survey, aptly titled “Flying Blind,” by Sun Life Financial, 90 percent of respondents said they had no idea what their future medical costs might be, nor how to estimate them; 75 percent said they had no strategy for paying post-retirement medical costs.
A second and related mistake is overestimating Medicare benefits. After age 65, Medicare makes it easier to manage medical costs, but it doesn’t cover all health-related costs. If you encounter serious health problems, the co-pays and deductibles can add up quickly, and some expensive drugs may not be covered at all. And although Medicare covers up to 100 days of doctor-ordered rehabilitation following a hospital stay, after that you’re on your own.
How to fix: Do the math, and make sure your estimate for retirement savings includes money to supplement Medicare. One Fidelity survey estimated that additional medical costs add up to $200,000 for the average person over the entire post-retirement lifespan. Consider buying supplemental health insurance coverage to fill in the gaps.
Plan for long-term care as well; buy long-term care insurance or make a plan for who will care for you, and how, if you suffer a debilitating medical condition that doesn’t allow you to live independently at home. Depending on your situation, it’s safest to plan for some type of assisted care, whether at a facility or provided by an in-home care service. If you’re planning to rely on Medicaid to fund assisted living, be aware that you must have less than a few thousand dollars in assets to qualify.
When you’re retired, your needs change, and some popular financial products and services no longer make sense. You may not even need life insurance anymore if your original purpose was to replace lost income for your dependents – income you’re no longer earning. In addition, older adults are easy prey for those selling annuities, insurance policies, and investments that may not be the best idea or may even be downright fraudulent. Keep in mind that frauds and scams aimed at older adults are on the rise.
How to fix: Review all your insurance policies to see if they still make sense. If possible, consult a reputable financial advisor who can help you analyze the risks and benefits of each type of policy you hold. Be careful with products such as annuities, which can lock up your funds and have high penalties for withdrawals.
Be wary, too, of anyone trying to sell you something – in particular, sales pitches that come over the phone or solicitations that come in the mail. Run your decisions by someone you trust before signing anything or making a large payment to anyone. Don’t make any financial decisions under pressure, whether it’s from someone you know or even a representative at your bank or other financial institution. (Even reputable banks and savings and loans have been known to give retirees the hard sell on annuities, reverse mortgages, and other products that may or may not be appropriate.)
Until a few years ago, downsizing early wasn’t such a terrible idea. In fact, people who lived where real estate costs were rising year after year treated the equity in their homes as a retirement fund. But in the past three years, many people who counted on their home for a nest egg found it seriously cracked. The housing crisis slashed almost a third of the value of most homes nationwide, and 22 percent of all homes are “underwater,” meaning the owners owe more than they’re worth.
How to fix: Instead of selling, get creative with what you have. Sarah Williams of Pinole, California, realized a few years ago that her plan to sell her home wasn’t going to fly. Instead, she partitioned her three-bedroom home. She hired a handyman to build out a simple kitchenette in an existing laundry room, carving out a small apartment for herself within the larger home. The rest she rents out to local graduate students, making it possible for her to break even on her mortgage payment.
Instead of selling his extensive acreage in North Carolina, James Rothblatt turned the backyard into a storage lot for recreational vehicles. People pay him monthly rent to park their RVs safely behind a chain-link fence, making it possible for him to stay in his home at almost no cost. He charges additional fees for regular washing and servicing.
Should you retire as soon as you legally can? Many people seem to think so: Government records show that three out of four retirees sign up for benefits starting at age 62, the earliest year allowed, losing out on 25 to 70 percent of their potential benefits. Hidden in this mistake is a second miscalculation, which is underestimating the number of years you’ll live after retiring. As many as 67 percent of us are seriously wrong about this, according to a survey by the Society of Actuaries, underestimating current life expectancy by five years or more. That can be an expensive mistake when calculating whether you have the money you’ll need to cover your costs of living.
Here are the real numbers: According to Social Security data, at least one member of a 65-year-old couple can expect to live another 23 years, to age 88. But remember, that’s just the average; one-third of all retirees will live to age 92, meaning savings will have to stretch to cover 27 nonworking years.
How to fix: Unless you absolutely have no choice because of health problems or inability to find work, plan to keep working as long as you possibly can to maximize social security benefits. If you work until you’re 66, you’ll receive 25 percent more per month for the rest of your life, and if you can make it until age 70, your monthly paycheck could be 75 to 80 percent higher. This could make all the difference between a comfortable, healthy retirement and one in which you have more free time but are stretched too thin to enjoy it.
A vast number of Americans haven’t saved nearly enough for retirement, missing out on the benefits of compounded interest and investment returns. According to the 2011 version of the Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI), 56 percent of all workers have less than $25,000 worth of combined savings, excluding their homes, and 29 percent have saved less than $1,000. Even scarier, 32 percent haven’t saved at all.
How to fix: Sit down with a certified financial planner to make a detailed retirement plan. “Not knowing what you’re going to need is what makes looking ahead to retirement scary,” says financial planner Phyllis Garratt. “People find that once they make a plan, it’s not nearly as bad as they thought – and they can sleep at night.”
If, like many people, you have no idea what your life will be like in 15 years, come up with several different possible scenarios and make a separate plan for each. You might make one plan based on selling your home, another based on keeping it, another based on relocating. Then start saving, and don’t worry if you have to start small. Look for hidden savings by reducing monthly bills, such as refinancing a mortgage or canceling a landline phone – and direct those savings into a retirement account.
This is one of those “what I wish I knew” situations: The majority of current retirees say they seriously underestimated what they’d need to live on. It’s all too easy to think, “Oh, I won’t need so much money when I retire. I won’t be spending much.”
“But that’s not what typically happens,” says certified financial planner Bill Losey, author of the Retirement Intelligence newsletter. “Whatever you liked to do before, you’re still going to like to do now. In fact, you’re going to have more time for it.” The more specific you can be in anticipating what your future life might look like – and cost – the better you can plan.
How to fix: Start with a ballpark number you’ll need for retirement: the general rule is 65 to 70 percent of your current household budget. Then use one of the newer, more complex retirement calculators offered by AARP and financial planning organizations and factor in every possible expense you’re likely to incur, including moving costs if you plan to relocate, travel costs, supplemental medical costs – and helping spouses, adult children, aging parents, and other family members weather unexpected crises.
Take off the rose-colored glasses and plan realistically for contingencies. Do you have an adult child likely to be dependent on you due to disability? Do you have a hobby to support or numerous grandchildren you’ll be flying frequently to visit? On top of those anticipated costs, add a category for miscellaneous unexpected costs.
Fear leads most people to make one of two big mistakes: Afraid of stock market losses, many people keep too large a percentage of their savings in fixed accounts such as savings and certificates of deposit. Inflation then erodes these savings, so they lose value over time. Others, fearing that they’ve started saving too late in life, take on too much risk, choosing investments that promise a high rate of return but are more volatile – often leading to big losses.
Fear can also lead people to hop into and out of the market based on the latest news reports, even though trying to “time the market” almost always leads to losses over time.
How to fix: Knowing the appropriate amount of risk that’s right for you – and how to minimize other risk factors – is key to having your nest egg ready and waiting when you retire. Balance your fear of losses with your need for gains by making smart choices about what percentage of your savings should be in safer certificates of deposit and other fixed investments, and what percentage should be invested. It’s best to make this determination based on your age, what you need the money for, when you’ll need it, and how much you’ll be withdrawing at a time.
When it comes to investing, there’s a one-word answer: diversification. Most people, financial adviser Garratt says, think they’re diversified when they’re really not – they buy a variety of funds that actually all have pretty much the same holdings. The real answer is spreading your answer over all asset classes, including small-cap stocks, large stocks, international stocks, bonds, real estate trusts, and more.
“If you diversify by spreading your investments over a variety of asset classes, some will zig while others zag, and over time that smooths out the bumps in the market,” Garratt says. If investing on your own, the best way to obtain this balance is to choose low-cost index funds.