4 Common Pre-Retirement Mistakes

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On the eve of retirement, there's a lot going on in your financial life. There are numerous major (and in many cases irrevocable) decisions to make that will affect the rest of your life. And if you make one or more of the following common mistakes, you'll likely regret your decisions for years to come.

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1. Tapping your retirement savings early

Once you hit age 59 1/2, you can withdraw money from your 401(k) or IRA without being hit by an early withdrawal penalty from the IRS. However, that doesn't mean taking money so early is a good idea. Your retirement savings will likely provide the bulk of your income during your retirement. If you start drawing on that money before you ever retire, there's an excellent chance that the remainder won't be enough to last as long as you do.

Instead of taking money from your retirement savings accounts, do the opposite and consider escalating your contributions. Workers age 50 and older can make catch-up contributions, raising the annual contribution limits for both IRA and 401(k) accounts. It's true that any money you put into your retirement savings account right before you retire won't have much time to grow, but every penny you put in at that late date will still help to boost your retirement funds.

2. Selling out of stocks

Many investors suffer from the misperception that stocks are too risky for retirees. In reality, not owning stocks after you retire is far riskier. While stocks are far more volatile than many other types of investments, bonds included, they also produce a very high average annual return compared to less volatile investments.

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If you put all your money in bonds and cash equivalents the day you retire, your portfolio likely won't even keep up with the rate of inflation -- meaning it will shrink instead of growing every year. And without a reasonable growth rate, your retirement savings are unlikely to last long enough. For example, if you withdraw just 4% of your total portfolio value each year and your portfolio investments are neither gaining nor losing value, you'll run out of money after 25 years. Assuming you retired at age 65, you would be 90 years old at that point, which is a bad time to be broke. Yes, you might not live to be 90, but do you really want to base your retirement planning on that assumption? And if your portfolio is actually losing value instead of just staying steady, you might run out of money a lot sooner.

3. Claiming Social Security early

You can start receiving Social Security benefits as early as age 62, but doing so comes at a cost. Claiming Social Security benefits before your "full retirement age" means your benefits checks will be permanently reduced by a percentage based on how early you claimed them. While claiming Social Security early may sometimes make sense (for example, if you expect a shorter lifespan than the one predicted by actuaries), taking the money early just because you can is a really bad idea.

For most retirees, waiting at least until full retirement age to claim Social Security benefits is the best move. If you wait until after full retirement age to start getting those checks, you'll get delayed retirement credits that will increase your Social Security benefits once you do start receiving them.

4. Not having a Medicare plan

Enrolling in Medicare is... complicated. The enrollment process isn't that difficult, but there are a million important decisions to make along the way. Will you choose original Medicare or a Medicare Advantage plan? If you choose original Medicare, do you also need a Medigap plan? Will you get prescription drug coverage through Part D or would it be better to pick a Medicare Advantage plan that provides prescription coverage? Is an HMO or a PPO a better choice for you?

Researching your Medicare options and making the big decisions early will make the Medicare enrollment process much smoother. The more you know going in, the less likely you are to make a bad decision in the frenzy of the moment. And doing some prior planning can help you avoid making the biggest Medicare mistake of all: failing to sign up during the initial enrollment period. If you miss this seven-month period surrounding your 65th birthday, the resulting penalties will likely affect your Medicare premiums for the rest of your life. That's one costly mistake you'll definitely want to avoid.

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