Common wisdom states that you should start preparing for your retirement on the day that you receive your first ‘full-time’ paycheck. But, as many of us know, that is often easier said than done.
For many individuals and couples who are 45+ years of age today, there are many factors that may have caused those ‘best laid’ plans to have been derailed. Who didn’t get financially and/or professionally impacted by the ‘Great Recession’ that began 7-8 years ago (and is still lingering around for some)?
Other factors that might have impacted your retirement plans include unplanned, higher educational costs for children, market devaluation in your property(s) in the housing ‘bubble’, and/or unforeseen medical expenses.
The bad news for many empty-nesters and baby-boomers today is that they may not be as prepared for retirement as they had hoped. And this may also have forced some to plan for a later retirement date.
But, the good news is that if you have a decade or more to plan, you can minimize some of the retirement financial pitfalls that can add additional financial stresses to your retirement years. Avoid retirement financial pitfalls by planning for realistic lifestyle changes.
1. Avoid retirement financial pitfalls by planning for realistic lifestyle changes
It has been a rule of thumb that projected retirement income can be about 70% of your current income. This takes into account the regular income that you might be expecting from a combination of social security payments and investment withdrawals. (And remember that much of this retirement income is taxable.)
If 70% of current income is the maximum retirement income that you can expect, would you be able to live comfortably? What might you need to ‘give up’ in your current lifestyle to reduce your monthly expenses by 30%?
It might mean that some strategic planning will help to absorb this shortfall. Perhaps, the cost of the family summer home will need to become the adult childrens’ responsibility. Or, maybe a couple will only need one automobile when no one is going to work on a daily basis.
It’s important for you, your spouse and family to discuss these topics before retirement.
2. Be realistic about the Social Security program
The Social Security system may be a different program for our children in the years to come. But, most empty-nesters and baby-boomers who have not yet started qualifying for Social Security payments should expect to see payments out of the system. What might surprise some is the amount of those payments.According to the Social Security Administration’s “Fast Facts” for 2015, “the average benefit paid to retired men was $1,488 per month in Dec. 2015 and $1,167 to retired women on their own work record. The average spousal benefit paid to women on their husband’s work record was $680 per month and $520 per month to men on their wive’s work record.”
The average Social Security payout was never planned to make anyone rich. The program was originally designed to supplement private pension and retirement savings. Unfortunately, the stats indicate that millions of American retirees today use it as a primary — sometimes only — source of retirement income. This is why the following pitfalls should be addressed as soon as possible.
3. Time your retirement to maximize your Social Security benefits
As I stated earlier, many of us will be working longer than we originally planned, due to recent career and/or financial setups. In the case of the Social Security benefits, this may be a good thing.
In most cases, eligibility for Social Security benefits begins at 62 years of age. In some cases, beginning to draw from your benefits at this age may make sense (or may be necessary).
But, keep in mind that you won’t see your full benefits if you start drawing benefits prior to 66 years of age (or 66.5 years, in some cases.)
If you are able to wait until after 66 years of age to draw benefits, your full benefits amount will be increased by 8% annually until you reach 70 years of age (for a total increase of 32% over your ‘full Social Security benefits’ amount.)
If health and work opportunities allow, it will benefit you to delay tapping into Social Security benefits as long as possible (at least until 70 years of age.)
Note: Remember that social security benefits can become taxable up to 15%, based on your situation at the time.
4. It’s never too late to invest in your future
If you are currently working for a company that provides 401- or 403- investment programs, you should try to max out your payroll contributions to those investment accounts. And it is important to understand any employee matching program so that you can take full advantage. Just remember that any employee matching money is FREE MONEY. Don’t miss out on it.
It is also important to understand how your investment is currently distributed. One school of thought says to move money to more secure/stable investment portfolios as you get closer to retirement. But, the other school of thought recommends that you try to get your money to work as hard as it can for you, up to the last days. It is conceivable that you might end up with a 35 year investment horizon after retirement begins. If you compare the cost of living increases with your investment, you could be getting behind by being too conservative in your investment portfolio strategy. Ultimately, you will need to speak with your financial planner to understand the risks and your risk tolerances.
You will also want to consult with your financial planner about planned investment withdrawal strategies once you retire. There are usually ‘required minimum distributions’ RMD’s that will begin at 70 1/2 years old. The proper strategy for how you withdraw retirement funds will maximize your overall portfolio.
5. Get your financial ‘house’ in order before retirement
Property costs and debt do not disappear once you stop working. In fact, more people are making a monthly home mortgage payment well into their retirement than has ever been the case. This may have to do with the ‘recession’ or the mobility of our society. Instead of buying that one home early in life and paying it off before retiring, many people have been buying several homes during their career (due to career moves and increased income). This often means that they may have a decade or more of mortgage payments during their retirement years.
The following are some quick questions to stimulate your thought process on some of your largest debts —
Can you plan to accelerate your mortgage payments in order to have it paid off prior to retirement? Can you downsize your home?
Another issue for home ownership includes property taxes and possibly, HOA fees. Are you planning those expenses into your retirement?
If you own more than one home, have you considered making the more expensive one your primary residence prior to retirement? This could help reduce property taxes and/or capital gains taxes if the home is sold.
If you do plan to sell a home at or near retirement, remember that your first $500,000 in profit is tax-deductible. If you plan to do this, are you saving all of your house-related expense paperwork so that you don’t pay unnecessary taxes?
If, on the other hand, your current or future retirement situations require you to lose a home through foreclosure, or if you need to default on any credit card debt, remember that any debt that is written off will be treated by the IRS as untaxed income. This type of situation may require the assistance of a tax attorney.
Many of the biggest financial and tax pitfalls that I encounter in my law practice are generally avoidable IF they had been addressed prior to my client’s retirement. The ones that I have covered in this article are some of the more universal issues.
Many people will have additional, specific issues that will be best addressed with a tax lawyer and/or financial advisor. The value of these advisors is beneficial – not only from a knowledge perspective, but from an objective/less emotional perspective.
Jeffrey L. Cohen, Attorney at Law
Not everyone will need the advice or assistance of a tax attorney. Most will do well just keeping in touch with their investment advisors and accountants. But if you have a question, and even if you think it might be stupid, it is always better to get the question resolved in advance than to hire the attorney to fix the resulting problems.
About the Author: With more than 30 years of experience helping private individuals and business owners with tax, business, estate planning or probate concerns, Jeffrey L. Cohen, Attorney at Law, is well prepared to address your legal matters. He holds a Masters in Tax Law from Emory University School of Law and practices law in Atlanta, Georgia. You can connect with Jeff at www.irslawproblems.com.