Winning at retirement may come down to you dodging these 3 careless mistakes
You might have a financial plan, some savings and a targeted age in mind for when to hang up your hat and coast into your golden years.
But many Americans don’t pay enough attention to planning their after-retirement finances — an oversight that could have serious repercussions on the quality of life they’re able to sustain in their golden years.
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Here are three careless mistakes that could keep you from winning at retirement.
1. Overlooking inflation
Inflation could put a considerable dent in your nest egg — and ignoring or overlooking its effects could be a big mistake.
If you retire today, the inflation rate you’re expected to face over the next 30 years is 2.51%, according to a forecast by the Federal Reserve.
On an annual basis, these increases may not seem like much, but they can add up over time. For example, at 2.51% per year, a grocery bill of $100 today will cost you over $125 a decade from now.
Consider setting up a diversified portfolio and speaking to a financial adviser. Assets such as gold, real estate investment trusts and inflation-protected bonds may help your portfolio beat inflation, though they’re not the right investments for everyone.
You can also adjust your spending habits, like creating (and sticking to) a budget shopping around to lower your car insurance and reducing food costs through meal planning and coupons.
2. Paying too much tax on retirement income
There are two ways you might be paying too much tax on your retirement income — not accounting for taxes on Social Security benefits and not planning for taxes on account withdrawals.
For example, if you’re jointly filing an income tax return with your spouse and your combined income exceeds $44,000 per year, up to 85% of your Social Security benefit can be taxed. You can use an online IRS tool to determine if your benefits are taxable.
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Withdrawals from tax-advantaged accounts, such as 401(k)s and individual retirement accounts (IRAs), are taxed as ordinary income, so you’ll need to account for this in your planning and budgeting as well.
A financial planner can help you design a tax-efficient withdrawal strategy — but you’ll want to start this process long before retirement since some strategies, such as a Roth conversion, may be more tax-efficient if executed over several years.
3. Not adapting your investment portfolio to life changes
It’s also important to plan for changes in your investment strategy before and after retirement.
Retirees often fall into two camps: Those whose portfolios are too aggressive, opening them up to potentially large losses, and those whose portfolios are too conservative, creating the risk that their funds won’t last as long as needed.
When you retire, you may want to move to a more conservative portfolio to protect your gains and buffer your savings from stock market swings. But you could also balance this out by holding some stocks, so your savings will continue to grow (which also protects against inflation).
You’ll want to ensure your portfolio can support your planned income stream throughout your retirement, including required minimum distributions, and that they’re as tax-efficient as possible as well.
Financial planning is more than a savings strategy. It’s important throughout your entire life — and it doesn’t stop in retirement.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
