Being in the home stretch leading up to retirement can feel great, but financial advisers say even the savviest people can miscalculate or overlook important components when it comes to their retirement plans. Unfortunately, the closer you get, the more harm those errors and omissions can do to your dream of a comfortable retirement. Here are the most common pitfalls you need to watch out for, according to financial planners:
Not creating a Social Security strategy. “One common mistake is not really thinking through when to start Social Security,” says Mike Wilson, owner of Integrity Financial Planning. In general, the breakeven age for Social security is in the low 80s, Wilson says. “If you think you’ll live past the breakeven age…wait as long as possible to start Social Security, because you’ll enjoy more dollars over a longer lifetime,” he says. But if your health is tenuous, claim your benefits early.
Married couples need to factor in the age of each spouse, expected lifespan and their respective work histories to figure out when to start claiming benefits. “If they haven’t already, create an account with the SSA,” Wilson says. “You’ve got to take some ownership and get involved in the process.”
Paying off your mortgage. Conventional wisdom says you shouldn’t enter retirement with mortgage payments hanging over your head, but if you took out a mortgage or refinanced recently, it’s possible that your interest rate is lower than what you would earn if you invested the money, says Rich Arzaga, founder and CEO of Cornerstone Wealth Management, Inc.
For instance, assume your nest egg is netting you a 7% return. If your mortgage interest rate is only 4%, it’s better to keep your money where it is because you’ll pay less to service that debt than you would earn by keeping it invested. (And you get to keep the mortgage interest tax deduction.) “You’re basically leveraging the money, you’re borrowing just like the banks do,” Arzaga says.
Taking your portfolio too conservative too soon. People in pre-retirement often make the mistake of retreating from riskier asset classes too early, says Chris Chaney, vice president of Fort Pitt Capital Group, Inc. Depending on when you retire, you could live another 20 or 30 years. “That’s a long time, and the inclination is to try and secure the cash flow and the value of their portfolio as much as possible,” Chaney says.
People assume they need to shift a big chunk of their portfolio to lower-yielding investments to safeguard it, but they forget about the flip side of investing risk: the creep of inflation. “You need an adequate amount in growth assets to be able to protect the purchasing power of your retirement assets against the corrosive effect of inflation,” Chaney says.
Skipping long-term care insurance. Paying out of pocket for long-term care can drain your nest egg. Living in a nursing home costs more than $80,000 a year, on average. Even assisted living or other forms of support can cost several thousand dollars a month.
When it comes to buying long-term care insurance, “The sweet spot where you get the highest benefit for premiums paid is 53 or 54 years old,” Arzaga says. If you’re in pre-retirement and above that age, it doesn’t mean you’ve missed the boat entirely, but it does mean you have a dwindling window of time to get an affordable policy. “Pre-retirement, the cost of insurance to cover that risk is a lot less expensive,” he says.
Not planning for a post-career life. “A lot of people don’t really think though how they’re going to occupy their time,” says Joseph Heider, president of Cirrus Wealth Management. “It’s a profound new stage of your life. and you want to make sure you’re ready for the change.”
Consider what activities or hobbies you’d like to pursue, and explore social groups and volunteer opportunities. If you’re thinking about moving, especially to a vacation locale, visit when the tourists have departed for the season.