Some of the first things retirees should do when they retire include applying for Social Security benefits, checking into their investment accounts, and updating their estate plans. On the other side of the coin, what should new retirees avoid doing?
Some answers may surprise you. Avoid making the following mistakes that can hurt your retirement savings and lifestyle.
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Don’t Be Too Rigid With Retirement Spending
There’s nothing wrong with carefully reviewing your spending habits when you retire. However, it’s a good idea to avoid being too rigid in your plans.
The reason retirees need to be flexible with their retirement spending is because of the return risk.
Jesse Cramer, relationship manager at Cobblestone Capital Advisors, said investments often produce bumpy returns. Usually, we tend to see good returns (bull markets) or poor returns (bear markets) for several years in a row. Starting out with a few years of poor returns causes a disproportionate amount of portfolio stress.
“The most important weapon retirees have to combat an unfortunate succession of returns is to remain flexible in their retirement spending,” Cramer said. “The return risk increases when a retiree withdraws money from his portfolio. The more money he withdraws, the greater the risk.”
Cramer advises retirees to put off some of their expenses, such as putting off a big trip. This gives the market and their portfolio time to recover and reduce the risk of sequencing returns.
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Don’t forget to plan Social Security
You do not have to receive Social Security benefits when you retire.
Although you can already receive benefits at the age of 62, you should think carefully about whether you should start collecting or postpone it. You can’t defer Social Security until age 70 to receive the full payout. Choosing the optimal strategy that fits your financial situation and overall lifestyle, whether it means paying at age 67 or waiting until age 70, can result in thousands of dollars more potential income during your retirement years. .
Don’t Spend Your Investment Capital (If You Can Avoid It)
Bob Sewell, CFA and CEO of Bellwether Investment Management, advises his clients to write off no more than 4% of their portfolio value from their accounts each year. Taking out more than 4% means you’re spending some of your investment capital – and retirees need this capital for the many years of retirement ahead.
If you’re spending more than 4%, Sewell recommends creating a spending plan to see how much capital can be used from year to year without running out of money too quickly. Part of this plan should look at optimizing where you get your money out of your various investment accounts.
Don’t take on debt
Ideally, by the time you retire, you should have paid off all your debts, including student loans, mortgages, and credit card balances. If you have paid off your outstanding debt, do not take on any additional debt.
“You don’t need that burden when you retire when your income may be lower, and you don’t have the same opportunities to supplement it through labor sources,” Sewell said. “Carrying credit card debt month-to-month, lines of credit, or a new mortgage rarely make sense, so do your best to avoid it.”
Don’t count on an inheritance
Sewell often sees clients expecting a windfall from an inheritance to aid them in their retirement. Counting on an inheritance, regardless of the amount, is not a pension plan.
“The legacy you expect may end up being much smaller than you expect, maybe not received for years or not appearing at all,” Sewell said.
The better approach is to think of any inheritance as a bonus to your retirement plan.
Don’t underestimate healthcare costs
Healthcare is one of the most important expenses in retirement. It is not uncommon for retirees to underestimate the amount of money needed for health and medical insurance.
Once you become eligible for Medicare, make sure you understand what is and isn’t covered by your Medicare plan. This allows you to better budget for medical expenses and be ready to cover costs that are not covered by Medicare.
Don’t make all your retirement planning yourself
You don’t have to do all your retirement planning alone. It can also be difficult to manage retirement planning alone in the event of unexpected circumstances, such as a partner’s death or disability, leaving the surviving partner with a challenging financial burden.
Sewell recommends that you find a trusted fiduciary or financial professional who can help ensure that your investments are well managed and that you and your family are in good hands when you retire.
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This article originally appeared on GOBankingRates.com: 7 Things Not to Do When Retiring
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