You said goodbye to your boss a year ago. You spend your days as you wish, retirement is sheer bliss. While you may be enjoying yourself, the question is how good a job are you doing with your money, now that there's no paycheck to cover a multitude of sins? There are more than a few ways to trip yourself up during the first year or two of retirement.
Here are few landmines to steer clear of.
Delay taking Social Security
If you have no other options than to tap Social Security as soon as you're eligible that's one thing, but the longer you delay getting money from Uncle Sam, the better. “Collecting too early is a mistake. Collecting at 62 mean a 25% reduction in benefits for the rest of your life. If you were born in 1943 or later, delaying until age 70 means an extra 8% 'bonus' for every year you wait,” explains Karen McIntyre, managing director and senior financial advisor for Wescott Financial Advisory Group.
Don't get too conservative
Realize that at this phase of your life when most likely there's more time behind you than in front of you, you can ill afford to lose your shirt with risky investments. However, it's about balance. “You don't want to get overly conservative with your investing. A 100% bond portfolio is NOT a risk free portfolio. We typically recommend 60% stocks, 40% bonds, or even 70/40, because the stock component provides the necessary long-term returns and inflation hedge that bonds don't have to ensure a comfortable retirement,” says David Edwards, president and portfolio manager of Herron Financial Group.
You could have a decade or two or more in retirement, you want investments that can withstand inflation and give you earning power for many years.
Hold off on touching your IRA
It's not unusual for people to prematurely withdraw from their IRA accounts. “We tell our clients to hold off drawing on IRA accounts as long as possible, preferably until age 70 ½, when they must withdraw,” says Edwards. He wants his clients to obtain tax free growth in those accounts for as long as possible. Meanwhile, money drawn from a taxable account may have a lower tax burden, he says. “To pay a client's draw we need to sell $100 stock with a cost basis of $50. The client will owe a 20% capital gain of $10, or a 10% tax hit. Any money withdrawn from an IRA account is taxable at up to 39.6%, plus state taxes,” he says.
Spend your investments carefully
The biggest mistake people make is spending too much from their portfolio early on, says Elle Kaplan, CEO of Lexion Capital Management. To determine how much you can safely spend each year, create a “retirement road map” that illuminates how you will navigate your remaining years each step of the way. “This road map should be an all-weather plan that takes into account a wide variety of market scenarios and economic conditions so that you are prepared for any situation. Plan as if your life expectancy is 100 and be sure to build in room for inevitable bumps in the road and the unexpected expenses they may bring.”
Get estate plan in order
At this stage of life, if you don't already have an estate plan, it's time to put one in place. “Actively discuss end of life decisions with loved ones. Let family know where documents are kept and who your advisers are,” says Frank Goins, client advisor, SunTrust Private Wealth Management.
Proper legal documents, such as a will, health care proxy, and power of attorney, can save a lot of money if someone becomes ill or passes away. “Have your documents in order, review them frequently and be sure they say what you want. Don't put a son who can manage money as the executor of your will or as your power of attorney because he is your son. If he can't manage his money, how do you think he will manage yours?” asks Annalee Leonard, president, Mainstay Financial Group.
Not sticking to a budget in retirement will catch up to you much quicker than when you were employed and had the luxury of working over-time or collecting bonuses. “Being retired means having more free time, but that also means more time to spend money. You may need more money than you thought, especially if you want to travel,” says Mary Kelly, author of Money Smart. If you really can't afford all your new hobbies or to travel as you would like, figure out where else you can cut expenses, or determine whether you want to work part-time or freelance, or otherwise get extra cash for all your pursuits, let alone any unexpected expenses that can wreck your budget. Simply put, you can't spend like you did while you were working. Cutting back includes family, which is a big issue.
According to Merrill Lynch's recent study, Americans' Perspectives on New Retirement Realities and the Longevity Bonus, conducted in partnership with Age Wave, within many families, one or more individuals may be struggling financially. Balancing an individual or couple's retirement needs with the needs of parents, siblings and grandchildren is a growing and complicated challenge. In the survey, 52% of parents said they expect to provide their adult-age children with some form of ongoing support – be it financial, healthcare, housing or education and 35% believe they will need to support their grandchildren in such ways. “Remember the grandkids can borrow money for a home or for education. As a retiree, it's very tough to get a loan. Focus on funding your own retirement years,” says Kelly.
Don't miscalculate impact of moving
It seems smart to move or to downsize to a smaller house. “But if you're used to a 3,600 square foot home and move into 900 square feet you might find that you as a couple are getting in each other's way,” warns Kelly. Furthermore, moving to a new community, particularly if you don't know anyone there, could prove a major mistake. “Retirement communities often claim to be less expensive than staying in your own home, but with the rent, utilities and mandatory meal plans, it is often the same or more expensive. Why downsize into a place if it is not better for both of you?” says Kelly.
Don't underestimate the emotional impact if you move to a new location where you have no family or friends, worse still if you move so far that it's not convenient or is too costly for you or your loved ones to see each other frequently.
It's early days yet, so even if you've veered a bit from the best retirement path, it's not too late for a course correction.