Times are changing, and that’s particularly true for the millions of Americans nearing retirement. After all, this isn’t your grandfather’s retirement.
Long gone are the days where workers could rely on pensions to fund their nest eggs; now workers must rely on their own savings tactics in retirement—which is easier said than done.
“There’s a rampant lack of financial preparedness in this country,” says Clarence Kehoe, executive partner in accounting firm Anchin, Block & Anchin. “People don’t know what they need to have financially when they step into retirement.”
Whether it’s not saving enough, or being too conservative with their investments, people already in retirement make many mistakes that adversely impact their lifestyle that can tarnish their so-called golden years. But that doesn’t have to happen to you. Before you let history repeat itself, check out these five lessons financial planners and their retired clients:
Lesson 1: Know Your Expected Lifestyle and Plan Accordingly
Many retirees wrongfully assumed their expenses would automatically decrease when they left the workforce so they won’t need their full salary to get make ends meet.
Sounds good on paper, but the reality is, expenses often either stay the same or go up enough to make a difference, according to Scott Cramer, president of retirement and estate planning firm Cramer & Rauchegger.
The tradition school of thought was that people should plan to need two-thirds of their current income in retirement, but Cramer says people will likely need more--80% to 110%--depending on their hobbies.
“We tell clients to do a detailed budget of what they will be spending and doing in retirement,” he says. “If they are traveling, then have a travel budget. If they want to play golf four times a week, they need to know how much that costs.”
Lesson 2: Realize You Could Live Longer than Expected
Just a couple decades ago, the average life span was in the 70s, but now people are living well into their 80s, 90s and even 100s, and living longer requires precise financial planning.
“Retirement lasts a long time so people have to change their asset allocation in retirement,” says Harriet Greenberg, partner in accounting firm Friedman LLP. She says often people move all their investments into bonds when they retire because they consider it a conservative move, but because they are living sometimes 30 years in retirement, they need to have a more diversified investment portfolio.
“You have to have an allocation that supports the needs going forward such as the need for growth and the need for protection against inflation; 100% bonds won’t do that for you,” says Greenberg.
Lesson 3: Pay Off Debt Before Retirement
Being saddled with credit card debt on a fixed-income is a major budget constraint in retirement, and financial planners recommend paying down as much debt as possible (if not all) before leaving the workforce.
First tackle debt with the high interest rates and then work to pay down payments with lower rates like a mortgage. “Once you’re done dealing with your financial obligations, look at your whole profile and minimize the amount of debt outstanding,” says Kehoe.
Lesson 4: Don’t Push Off Saving
One of the biggest mistakes a person can make is waiting too long to start saving for life after work. According to Cramer, many people start saving for retirement in their 50s or 60s when in reality, it should have started in their late 20s or early 30s.
“If you are staying out of debt and systematically putting money away for retirement, you’ll have a better retirement than if you are trying to do it all at the last moment,” says Cramer.
Lesson 5: Calculate an Estimate for Your Health Care and Tax Needs
Because people are living longer they will need more medical costs, and experts say this area is often grossly underestimated, especially when it comes to long-term care needs.
“Nursing homes can cost upwards of $20,000 a month,” says Greenberg. She recommends people consider purchasing long-term care insurance in their early 50s when it’s still inexpensive to provide a financial peace of mind.
According to Cramer, retirees routinely underestimate the tax hit from drawing on their retirement accounts.
“In preretirement, we have three buckets: tax hostile which is the 401(k) and IRA, tax neutral which is savings accounts and tax free which is contributing to a Roth IRA,” says Cramer. With a Roth IRA you are taxed on the money when it goes into the account, avoiding getting taxed on any gains. “As a general rule, you’re better off in the long run by contributing to a Roth IRA.”