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As a certified financial planner, one of my most important tasks is preparing clients, financially speaking, for the unexpected. It’s easy for unforeseen costs to deplete a hard-earned nest egg too quickly for comfort.
Most clients are keen to tackle issues that can arise when they spend more than they make, or more than what they believe their retirement portfolios can withstand.
But not all retirement mistakes are budget-driven. Here are the top three mistakes I see as a financial planner.
1. Not mastering Medicare
It is no secret that one of the many dangers to a healthy retirement portfolio is the cost of healthcare. In fact, studies estimate that the average 65-year-old couple will need approximately $300,000 in after-tax funds to cover healthcare expenses in retirement.
The first step to combating this astronomical cost and protecting your nest egg is learning to navigate Medicare properly. Unfortunately, unlike the nicely packaged group policies prepared by your former employer’s HR department, mastering Medicare will require you to roll up your sleeves or seek trusted guidance.
One important tip for doing Medicare right is not waiting until the last minute to apply. When initially enrolling into Medicare, your enrollment period can begin as early as three months before your 65th birthday month, and it will only last until three months after. Enrolling during your initial enrollment period (IEP) allows you to avoid late-enrollment penalties and sign up even with pre-existing conditions.
Fortunately, you don’t need to go through the process every year: Medicare Parts A, B, and D automatically renew. But it’s still worth checking in with your plan on a regular basis to make sure you have adequate coverage at optimal costs. For example, Part D benefits, the prescription drug plan, change annually, so reviewing this coverage during the fall annual election period is paramount.
2. Taking Social Security too early
Over the last decade, Social Security headlines have dominated mainstream media. Whether it’s estimating when trust funds are scheduled to be depleted or if retirees will receive a cost-of-living adjustment, Social Security plays a significant role in the American retirement system.
With Social Security representing approximately 33% of an average retiree’s income, the decision of when to begin taking your benefits must be made carefully — especially since, in most cases, this decision will last for the rest of your life.
Deciding when to take your Social Security retirement benefits is a personal decision unique to your cash flow needs and goals. That said, if you can afford to wait, I highly encourage you to do so.
With Americans living longer and life expectancies increasing, delaying your Social Security benefits can enhance your retirement income and provide a safeguard from you outliving your assets and your nest egg eroding due to inflation — much like a deferred annuity. It’s worth mentioning, too, that you’ll avoid the hefty penalty for taking Social Security early at age 62.
Additionally, taking Social Security before retirement — when you’re still earning wages and don’t really need it — can mean some of your monthly benefits will be withheld. The income thresholds are pretty low: $18,960 for single filers and $50,520 for those married and filing jointly. For every dollar earned over those limits, your benefits are reduced, and steeply: You’ll lose $1 in benefits for every $2 of earnings before full retirement age and $1 in benefits for every $3 of earnings in the year you attain retirement age.
The whole point of taking Social Security benefits early is to actually receive the income — so if you’re still working and out-earning those limits, it probably makes more sense to wait.
Navigating Social Security can be cumbersome, especially with the many moving parts it possesses. However, by obtaining a comprehensive financial plan, you can model out different scenarios to see how each decision will affect your current cash flow and the growth of your portfolio’s assets.
3. Not managing your fixed investments correctly
With the historically low interest rate environment we have been experiencing since the Great, you need to be very careful not to get lazy when managing your fixed investments within your retirement portfolio.
Going too far out on the yield curve (i.e., obtaining a long-term bond) can leave you vulnerable to substantial price movement should interest rates rise. In contrast, staying short on the yield curve protects you more from price fluctuations, but your investments will probably not beat the rate of inflation.
Therefore, savvy investors who are getting creative and staying active with their fixed investments reap the benefits in this low interest rate environment.
One time-tested fixed income strategy is bond laddering. This is the practice of laddering individual CDs or bonds across various maturity dates. Bond laddering will minimize exposure to interest rate risk and increase the yield on your fixed-income portfolio by keeping a small portion dedicated to long-term maturities.
If you are an investor who can tolerate a little more risk, then you should explore adding dividend-paying stocks to your fixed-income portfolio. Although dividend-paying stocks are equities, they are typically less volatile than most other stocks. In addition, high dividend-paying stocks are generally from more mature companies with a long history of earnings and financial strength.
Lastly, if neither of these strategies suits you, you may want to explore a multi-year guaranteed fixed annuity (MYGA).
This annuity offers a guaranteed interest rate for a predetermined amount of time (three to 10 years) and is backed by the full faith and credit of the insurance company. They operate very similarly to CDs, but MYGA rates are typically higher. For example, per Bankrate, the highest three-year CD rate is currently at 0.80%; meanwhile, the highest three-year MYGA rate is around 1.80%.
Preparing for the many pitfalls of retirement can be a daunting task. However, with hard work and assistance from seasoned financial professionals, you too can avoid a financial crisis in your golden years — or at least be better prepared should one happen.