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Making big financial mistakes can sabotage the comfort of your golden years. You can wreck even the best-laid plans with a single poor choice.
Be aware of these eight common blunders — some that many people make well before retirement age, and others that happen after they leave the workforce — and take action to avoid them.
Mistake No. 1: Failing to plan for medical expenses
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Medicare kicks in at age 65, but that’s not the end of your medical expenses. Fidelity estimates a couple, both age 65, who retire in 2018 will need $280,000 of their own money for medical expenses over the course of retirement. Such costs include deductibles for Medicare Part A and Part B (in-patient and out-patient insurance), and premiums and out-of-pocket costs for Medicare Part D prescription drug coverage.
- Read “The ABCs of Selecting a Medicare Supplement Plan.” If you have further questions, call your state insurance commissioner’s office to get help choosing the most cost-effective Medigap plan.
- To help dodge expenses from illness and disability, exercise regularly and stay at a healthy weight.
- Check into long-term-care insurance. It’s cheaper if you sign up when you’re younger.
- Think about moving to live closer to good medical centers, hospitals and family.
Mistake No. 2: Underestimating costs
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Retirement costs can be surprising — surprisingly high, that is. You may find that to manage costs, you need to earn some extra income. It’s not the end of the world, but possibly not what you had in mind.
If you do take this path, check the Social Security Administration’s rules for working while receiving Social Security benefits.
Take action: These days, it should be easier to find money-making opportunities that fit a retirement lifestyle: There are lots of jobs you can do from home, and lots of ways to earn a little money on the side. If you’re lucky, it may be something you love to do as a hobby — say gardening, tending pets, caring for children or working as a handyman.
For more, check out “20 Ways to Make Extra Money in Retirement.”
Mistake No. 3: Celebrating retirement with a big purchase
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No doubt you’ve got a wish list for retirement. But hold off on making major purchases at first. Instead, give retirement a spin and see what you’re spending each month.
Track expenses — every single one. A year’s tracking gives the best picture because it includes both one-time and seasonal expenses.
Take action: It doesn’t matter what tracking system you use. Just find one you like and keep it up. Keep receipts, watch bank and credit card accounts online on a weekly basis, and update your tracking regularly. Here are a few approaches:
- Try online budget programs. Money Talks News partner You Need a Budget lets you track expenses automatically. Other options include Mint and BudgetTracker.
- Do it yourself. Track expenditures manually and offline on a spreadsheet.
Mistake No. 4: Helping out adult kids
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Many parents set themselves up for a crisis in retirement by supporting adult children financially.
If you are a parent who gives money to an adult child, remember the following: Adult children still have time to pay off college loans and save for retirement. Their parents — in other words, you — are running out of time to save for the golden years ahead.
- Make a concrete plan with goals and deadlines for gradually withdrawing financial help from your kids.
- Discuss the changes with your kids and help them learn to budget.
- Model financial restraint and responsibility for your kids.
For more tips, read “Still Supporting Your Adult Kids? 5 Steps to Set Them Free.”
Mistake No. 5: Claiming Social Security too soon
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Waiting to claim Social Security benefits is one of the best investments around. As we point out in “12 Ways to Maximize Your Social Security Checks“:
If you start receiving benefits right at age 62, your checks will be forever 20 to 30 percent smaller than if you had waited until you reached your full retirement age.
A Social Security Administration table shows the reduction for taking early Social Security benefits depending on the year you were born.
- Go to SocialSecurity.gov’s My Account to see your estimated benefits. If you’ve paid into the Social Security system, you can create an account and pull up a statement showing what you’ll earn by claiming benefits at various ages.
- Keep your current job if you can and delay retirement. Or get a part-time job that helps you hang on longer before claiming benefits.
- Hire a Certified Financial Planner to review your retirement plan, income and expenses with you.
Mistake No. 6: Forgetting about the tax man
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The IRS won’t disappear from your life when you retire.
For instance, traditional tax-deferred retirement plans like 401(k)s and IRAs require you to withdraw a minimum amount each year beginning in the year you turn 70½. If you don’t, you could be hit with a big penalty.
Good planning — especially before retirement — can help manage the tax bite. Money Talks News founder Stacy Johnson says one strategy is to roll a portion of retirement savings into a Roth retirement plan, which has no minimum distribution requirements. Roth plans require taxes to be paid before money goes in. You withdraw the funds tax-free later. The strategies you use will depend on your income now and what you expect it to be after retirement.
Take action: Make a plan — or get expert help making one — that takes taxable retirement income into account.
Mistake No. 7: Ignoring estate planning
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Get your affairs in order before you’re ill or old. That way, you’ll control where your money and possessions go. It’s a kindness to your heirs, too, because they won’t be saddled with the work.
- Make or update your will. If appropriate, make a revocable living trust.
- Sign a durable power of attorney naming someone you trust to make your legal and financial decisions if you cannot.
- Assign health care power of attorney to someone to make your medical decisions if you’re unable.
Mistake No. 8: Investing too conservatively
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As retirement grows nearer, it seems prudent to invest more conservatively. But you could live another 20 or 30 years. Savings held too conservatively shrink because of inflation. A portion of your funds needs to grow.
“Never taking risk means taking a different risk,” Stacy says.
Take action: Learn about investing so you can be confident in taking measured risks to earn gains, even as you grow older. It’s not difficult to put up the basic rules for sane investing, including how to spread risk among diverse holdings.
What provisions are you making for your retirement? Share with us in comments below or on our Facebook page.
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