Don't let these mistakes ruin your retirement plans
Pre-Retirement Mistakes to Avoid
by Gary Foreman
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After decades of hard work, you're nearing retirement. It's a new chapter in your life, and a time when you have a number of important financial decisions to make. Naturally, you want to avoid making any preretirement mistakes that could cost you later.
To help us identify and avoid the mistakes that could cause a financial crisis in retirement before you even get there, we interviewed Wes Moss. Mr. Moss is the Chief Investment Strategist at Capital Investment Advisors and fee only financial planner in Atlanta, GA.
Q: It's surprising how many people who are in their 50s and nearing retirement are still paying off student loans. You don't recommend using money from a 401k or IRA to pay off those loans. Why is that?
Mr. Moss: This has a lot to do with taxes. Any money we pull from retirement plans will be taxed, and under age 59 1/2, we're penalized 10% on top of that tax. Adding insult to injury pulling a big chunk from an IRA (let's say $50,000) will also increase your overall tax bracket by adding to your AGI for that given tax year.
Ideally, we would all be "student loan free" when we get to our 50s. However, if we're not, we should still not use retirement (IRA/401k) funds to pay off these debts. The loan payoff source should come from either our after-tax savings or from our current income.
Q: We all know that the best time to start saving for retirement is when we're young and compounding can multiply what's saved. But what about people who are in their 50s and didn't save enough? Is there a way for them to catch up without taking dangerous risks?
Mr. Moss: Absolutely. In fact, 401ks allow for a "catch up" provision once we reach age 50. Most folks still think 401k contributions are predicated in percentage terms (in example, "I contribute 10% or 15% to my 401k") Since the cap for contributing is a nominal dollar amount, investors should think of their contributions in similar terms. If I'm under age 50, I can save $18,000 pre-tax in an IRA. Once I hit 50, I can save $24,000 ($6k more) in my 401k pre-tax. If you're making $100,000, $24k is 24%. If you're income is $50k, $24k in savings is a whopping 48%, etc.
Q: When to begin collecting Social Security is a major decision for every retiree. And, while it's good to have plans, is it important to make that decision before you retire?
Mr. Moss: I think it's extremely helpful to factor in when you plan on commencing Social Security payments. However, it's even better to run several different retirement scenarios in relation to your SS start date. Ask yourself these questions. What does my income and overall situation look like if I retire and begin taking Social Security at age 62? What does my plan look like if I make it to 65 or 66 before I begin taking Social Security? If I can wait until age 66 to take Social Security payments, will a part-time job from age 64 to 66 help bridge that gap? There are several very useful Social Security Optimizers on the web. Here is the calculator that I like to use. This way, as variables change, you can be flexible as to when you ultimately commence payments.
Q: Many baby boomers in their 50s or 60s are trying to help their kids financially. You suggest that there's a danger in that. Could you share what that danger is and what we can do about it?
Mr. Moss: Ultimately this comes back to teaching children (and adult children) to stand on their own two feet. As a father of four, I want the very best for my children, but part of that "best" is teaching them the value of money and the importance of self-sufficiency. The danger is a double edge sword. Not only can helping your kids "too much" financially bleed you dry, but it can also create a dearth in their own ability to make a reasonable living.
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Q: Housing is a major item in anyone's budget. What advice do you have for people in their 50s approaching retirement concerning appropriate housing expenses?
Mr. Moss: Don't be a "retirement renovator." Get all of the "big stuff" out of the way while you're working, such as a new roof, HVAC system, new kitchen, new bath, new floors, etc. Anything that can be a substantial hit to your retirement nest egg or post-working year's budget should be completed and paid-for while you are still working and earning a living.
Q: We've highlighted some of the mistakes people in their 50s approaching retirement make. Are there any other mistakes that are common and should be avoided?
Mr. Moss: Not having enough to do. According to my research, the "happiest retirees" have 3.6 core pursuits. Core pursuits are the equivalent to hobbies on steroids. The exact type of core pursuit matters as well, but is trumped by the sheer number of different endeavors. Unhappy retirees average only 1.9 core pursuits, and it's often too late to "get busy" with new passions once you quit working. Core pursuits should be a continuation of passions that you develop and hone for years before retiring.
Reviewed August 2017
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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