The 10 Worst Financial Decisions You Can Make In Retirement (Part 1)

In an ideal world, we would start contributing to our retirement savings accounts the moment we receive our first paycheck from our first job. With the rumor mill of declining social security benefits, you can no longer rely on this form of funding in retirement. In this time of fiscal uncertainty, there are many financial decisions that can make or break you during your formative years. Below are the ten worst financial decisions you can make in retirement.

Assuming You Will Retire at a Specific Age - There are many factors that can influence the age at which you retire, some of which are not in your control. An unfortunate layoff, forced early retirement or unseen health issues can cause you to retire earlier than expected. If you are counting on the last few years of savings to set everything in order, you may find yourself with a lack of income in a tough job market. This is why it is absolutely imperative that you begin your retirement planning as soon as you can. On the other hand, just because you reach 62 or 65 doesn’t mean that you should automatically retire. Take the time to do a cash flow analysis and speak with a financial planner to determine when you can comfortably retire.

Relying on the Advice of Friends and Family Instead of a Professional - Everyone has a friend or family member who is a self-proclaimed financial genius. They may even provide great tips for saving, but it is still best to sit down with a professional who can directly assess your finances. Your friend may have done a great job with his or her own retirement, but this doesn’t mean he or she understands your specific needs. In a worst-case scenario, he or she knows even less than you do and your retirement begins as the proud owner of a South American beet farm.

The earlier you begin creating a retirement plan, the easier it will be to manage in the future. The value of a professional who can integrate all of your income and savings into a cohesive plan cannot be understated.

Starting Social Security Too Early - Many people want to begin collecting their social security benefits when they turn 62 and first become eligible. What many people don’t realize is that the amount of benefits you receive scales with the age that you begin receiving benefits. The longer you wait to start collecting, the greater your initial annual income. The payments received if you begin collecting at age 70 (when benefits no longer increase) are nearly double those you would receive if you begin at age 62.

Social Security benefits offer many advantages over other retirement options and great care should be taken to maximize the return. The payments adjust with inflation, are uninfluenced by the stock market, are subject to little or no income tax, and can be passed to your spouse upon death. Careful financial planning can allow you to delay the onset of the benefits and reap the rewards of a very secure, lifetime payment.

Overlooking Tax Consequences - One of the primary benefits of starting an IRA is that after age 59 1/2, earnings from a Roth IRA are tax-free. However, earnings from a traditional IRA will require payment of taxes on earnings.  But if you withdraw money too early or too late, you will incur tax penalties, which can severely affect your retirement. This is another reason why you should plan your financial future with a professional retirement specialist.

Not Updating Your Retirement Plan - Reaching retirement doesn’t mean that it is time to abandon risk. Many retirees make the mistake of dumping higher risk equities from their portfolio in favor of low-risk bonds. The problem is that bonds don’t provide the long-term potential required to sustain a retirement income for twenty-plus years. CDs and annuities can provide guaranteed revenue streams, but you trade growth for security. Don’t be afraid to retain an asset allocation that is heavy on equities.

Source:  Julie Ewald, MyBankTracker

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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