Almost half of Americans surveyed have not planned financially for retirement, and nearly a third reported having no retirement savings or pension, according to a Federal Reserve report released last year. Even if you’re among the savers, your retirement can still go awry. Here’s a look at several ways that it can get off track.
1. Underestimating medical costs. The potential to live longer, even with a chronic medical condition requiring costly ongoing treatment, is a distinct possibility for retirees and could drain their retirement savings. Jean Wilczynski, a financial advisor with Exencial Wealth Advisors, a wealth management firm in Old Lyme, Connecticut, suggests that pre-retirees plan for their out-of-pocket medical costs to increase as they age. The Center for Retirement Research at Boston College estimated in 2010 that with Medicare and private insurance premiums — remember, Medicare doesn’t cover everything — an average 65-year-old couple can expect to pay $260,000 in health care and long-term care costs over their lifetime. There’s also a 5 percent chance the couple would exceed $570,000 in medical costs.
2. Forgetting to factor in changing housing needs. A growing number of Americans plan to age in place, staying in their current home rather than downsizing or moving into nursing homes or assisted living facilities. Between 2015 and 2025, the number of households age 70 and older will increase by approximately 8.3 million and account for more than two-thirds of household growth, according to Harvard University’s Joint Center for Housing Studies. Staying in a home that’s already paid off may sound financially smart, but it may have hidden costs in the form of renovations. “Even if you want to stay in your current home, a lot of times it needs to be remodeled so that entrances are level and access between an island and a sink of so many inches [can fit a wheelchair or walker],” says Frank McAleer, director of retirement solutions for Raymond James Financial. “Remodeling your home can cost $20,000 to hundreds of thousands of dollars.” Moving to a more suitable home or budgeting in advance for modifications could help cushion the blow of these extra costs.
3. Moving to the wrong state. Of course, not everyone wants to age in place. Some retirees relocate to warmer climates, and Florida is a popular destination with its sunny weather and lack of personal income taxes. In states like Florida with no income tax, a military retirement is also untaxed. Some states exempt military retirement from state income taxes, while others don’t, which can also impact retirees’ finances, says Wilczynski. But taxes shouldn’t be your only consideration. “If you move to a low-tax state, but you’re not near any family, traveling to see grandchildren might offset that,” Wilczynski says. If your health deteriorates, can you afford to pay for caregivers? Will you relocate again to be near family? Or can they come to you? Wilczynski suggests considering these scenarios before you move.
4. Claiming Social Security too soon. A retiree’s No. 1 financial risk is longevity, says Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College. “The average person age 65 can expect to live to age 82, and some of them are going to live a lot longer,” he says. Social Security checks may not be large enough to fund all your financial needs, but they will provide a steady source of income, so Webb recommends waiting until age 70 to maximize the benefits you collect. “If the household has got financial assets, there’s nothing to stop the household from first retiring, claiming benefits at the later date and using the household’s financial assets to fill in the gap,” Webb says. “They’ve got to look at the big picture, and the big picture is that even though the household’s financial assets are being drawn down, they’re building up more Social Security wealth.” (That’s assuming you live into your 80s or 90s. If you expect to die sooner due to a medical condition or genetics, that strategy might not pay off.)
5. Not thinking beyond the numbers. Some people obsess about withdrawal rates and actuarial predictions and forget the other aspects of retirement. In addition to preparing financially, you need to mentally and emotionally prep to leave the workforce, McAleer says. “Politically in our country, the focus has been on the [amount you’ve saved],” he says. “But for what? You have to first understand what retirement outcome you want.” Do you and your spouse want to travel more to see grandchildren or explore the world? Do you want to volunteer? Or do you envision a more relaxed retirement in a smaller home? “Unless you really consider all of these positive life events that you want to engage in, that’s what can cause a plan to blow up because you haven’t really thought about these things and planned for them,” McAleer says, adding that you should start asking these questions in your late 40s or early 50s, if not sooner. Thinking through the lifestyle you want gives you a goal to save for and could also help ease the transition into retirement.
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5 Mistakes That Could Mess Up Your Retirement originally appeared on usnews.com
