Mistakes to avoid right before retirement

After working for decades, most people are ready to relax and enjoy their retirement. However, it is easy for soon-to-be retirees to make mistakes that can leave them financially insecure and make their retirement neither relaxing nor enjoyable. Don't be an unhappy retiree — keep an eye out for these potential pre-retirement pitfalls as your retirement approaches.

Poor Retirement Planning – What do you plan to do when you retire, and how much money will you need for those plans? If you haven't taken the time to map out your likely expenses, how do you know when you can afford to retire?

Once you have settled on your plans, set up your retirement budget well in advance. Take into account your expected lifestyle and build in reasonable cushions to account for contingencies such as poor health (see below). Retirees frequently spend more than they expected prior to retirement, so pad your budget accordingly and leave extra room for an emergency fund.

A good rule of thumb is to plan to draw out 4% of your initial retirement balance annually, adjusting for inflation at the end of each year. Can you live on that amount? If not, re-evaluate your plans or change your retirement date until you have the appropriate funds.

Failing to Understand Retirement Income – Do not expect to live on Social Security benefits or the interest on retirement accounts alone. Think about your retirement income in cash flow terms, and plan out your Social Security strategy as well as your withdrawals from IRAsand/or 401(k)s. Planning your cash flows will help extend your nest egg, optimize your taxes, and identify weak spots where you need to build in contingencies. Seek the advice of a financial planner if you are having trouble plotting out your income and expenses.

RELATED: 10 Social Security rules everyone should know

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10 Social Security rules everyone should know
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10 Social Security rules everyone should know

6.2 percent payroll tax

Most workers pay 6.2 percent of their earnings into the Social Security system, and employers match this amount. Self-employed workers contribute 12.4 percent of their income to Social Security. You can see how much you have paid in and check that your earnings have been recorded correctly with a my Social Security account.

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$127,200 tax cap

This is the Social Security maximum taxable amount of earnings in 2017. Earnings above the tax cap aren’t taxed by Social Security or used to calculate retirement benefits. Workers who earn more than $127,200 in 2017 will notice a bump in their paycheck when Social Security taxes stop being withheld.

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35 years of earnings

Your Social Security payments are calculated using the 35 years in which you earn the most. If you don’t work for at least 35 years, zeros are averaged in and will reduce your retirement payments. Working for more than 35 years can improve your payments because your lowest earning years could be dropped from the calculation.

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$1,360 average payment

Retired workers will receive an average Social Security payment of $1,360 per month in 2017. Retired couples bring in an average of $2,260 monthly. Payments are adjusted each year to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Cost-of-living adjustments have ranged from zero in 2010, 2011 and 2016 to 14.3 percent in 1980.

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Initial eligibility at age 62

Workers first become eligible to start retirement benefits at age 62. However, monthly payments are reduced by 25 or 30 percent if you claim them at this age, depending on your birth year. For example, a baby boomer who qualifies for $1,000 per month from Social Security at age 66 would get a reduced payment of $750 per month if he elects to sign up for Social Security at age 62.

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The baby boomer full retirement age is 66.

People born between 1943 and 1954 are eligible to claim unreduced Social Security benefits at age 66. The full retirement age then gradually increases from 66 and two months for people born in 1955 to 66 and 10 months for those with a birth year of 1959.

The full retirement age will increase to 67.

People born in 1960 or later become eligible for the full retirement benefit they have earned at age 67. Millennials and members of generation X need to wait a year longer than the baby boomers and two years longer than their grandparents to claim their full retirement benefit.

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Maximize your monthly payments at age 70.

Social Security payments increase each month you delay starting your payments up until age 70. After age 70 there is typically no additional benefit to waiting to sign up for your benefit. Retirees can boost their monthly payments by 24 to 32 percent, depending on their birth year, by claiming Social Security at age 70.

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$16,920 earnings limit

If you work and collect Social Security at the same time at age 65 or younger, part of your Social Security payments could be temporally withheld if you earn more than $16,920 in 2017. Beneficiaries who exceed the earnings limit will have $1 in benefits withheld for every $2 in income above the limit. Those who turn 66 in 2017 have a higher earnings limit of $44,880, and the penalty declines to $1 withheld for every $3 in excess of the earnings limit. However, once you turn 66, there’s no benefit reduction for working and claiming benefits at the same time, and your payments will be increased to give you credit for payments that were withheld in the past.

$25,000 in retirement income

If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefits exceeds $25,000 ($32,000 for couples), half of your Social Security benefit becomes subject to income tax. And if these income sources top $34,000 ($44,000 for couples), income tax could be due on 85 percent of your Social Security payments.

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Poor Risk Balance – As retirement nears, you have less time to recover from a market correction, so you should shift your balance toward less risky investments such as bonds — but there is no need to go so conservative that your returns do not keep up with inflation. Check your portfolio annually and adjust according to your risk needs, or invest in a target fund that automatically adjusts your portfolio for you.

Acquiring Too Much Debt – It may be tempting to buy that vacation home or take that expensive trip early in retirement, but you are better off entering retirement with as little debt as possible. However, if you do plan to buy another home, do it while you are still working, as it will be difficult to qualify for a loan with a fixed retirement income. Similarly, it is usually best to consolidate and refinance all the debts that you can before retirement to receive a better interest rate.

Cashing in Retirement Assets Early – It is easy to look at the size of your nest egg and decide that you can tap into those assets before retirement, or to take Social Security Benefits early. Stick with the retirement plans you created above (you did create those plans, didn't you?). Taking Social Security benefits early may make sense if you are in poor health or need to deal with financial difficulties early in retirement, but in general, it is better to wait.

Stopping Your Saving – Some people think they have enough money entering retirement, while others assume they will never have enough and give up entirely. Keep a saving mindset as you enter retirement and not only will your nest egg grow, it will also last longer as you keep assessing the value of your purchases during retirement.

Ignoring Health Care – Health care costs, including long-term care, will probably be your largest retirement expense. According to Fidelity, a 65-year old couple embarking on retirement together can expect to spend $245,000 in uncovered (out-of-pocket) medical expenses throughout the rest of their lives.

Make sure that you have enough salted away to cover health care costs, and consider your plans for long-term care. Many people erroneously believe that Medicare will pay nursing home costs. Speak with your children and make sure everyone's financial expectations are on the same page — do not just assume that they will shoulder the burden of your care.

Financial discipline built your retirement nest egg, and that same financial discipline will keep it intact as you move into retirement. Combine that discipline with sound planning, and the result is likely to be a happy and enjoyable retirement.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

Originally Posted at: https://www.moneytips.com/mistakes-to-avoid-right-before-retirement

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