I work with retirees and their advisors often. Here are the five biggest (non-investment) mistakes I commonly see among them.
1. Helping the Kids. Parents want to help their children (and grandchildren). That’s normal. But retirees are often too willing to do so and too often risk their own financial well-being for the sake of their kids. What these well-intentioned parents often see as a crisis demanding their intervention is actually an adult making a mistake or series of mistakes that s/he should work to mitigate without mom and dad.
Parents want to save the day, but it is usually a mistake to bail adult children out of credit card debt, help them with other financial mistakes, or provide the wherewithal to buy a house or finance a business venture, even when the parents can readily afford it. That I often see it when they can’t afford it is tragic. A carefully designed financial plan is of particular help here. Without one, it’s easy to underestimate longevity or fall victim to the “planning fallacy” and be too optimistic about the future and, as a consequence, take too much financial risk to help children in a bind.
Parents should be especially careful about co-signing loans because any default or late payments can hurt their credit rating. What’s more, they should be aware that significant gifts can be taxable — this year’s gift tax limit is up to $13,000 and may be at risk going forward.
2. Underestimating Healthcare Costs. Not surprisingly, one of the bigger pitfalls facing retirees going forward is the cost of healthcare. According to various experts, a healthy couple in their mid-60s will need around $300,000 to cover health care in retirement. A couple in their mid-50s should plan on spending around $500,000 in out-of-pocket health care costs. Most retirees will not have saved anywhere near that amount. The average 401(k) account balance for 55-year-old workers contributing for at least 10 years is $234,000, according to Fidelity Investments, and that money is typically earmarked to fund retirement generally — not to pay for healthcare.
One potential solution is long-term care insurance, which can help cover the cost of home care or nursing home care should the need arise. Couples in their 50s and in good health can often buy a reasonable policy with an annual premium of around $2,500-3,500. Couples who have waited until their 60s to buy see premiums in the neighborhood of $4,000-5,000 a year. However, many retirees resist LTC insurance, seeing it as too expensive for something they may not use. A “hybrid” solution — combining LTC and life insurance coverage or a deferred annuity with a return of premium provision — may work for some who don’t want to buy LTC insurance outright. To consider options for long-term care planning, the federal government has provided some helpful information here.
3. Insufficient Assured Income. About one in four 65-year-olds today will live past 90 and, according to the Society of Actuaries, there is a 47 percent chance that at least one of a 65 year-old couple will live to age 90 and a 23 percent chance that at least one of them will live to age 95. This longevity comes with some serious financial risks. Indeed, according to data from the Employee Benefit Research Institute, roughly half of near-retirees today are likely to run out of money in retirement. The United States Government Accountability Office (an independent, non-partisan research agency that works for Congress) released a significant report on retirement income recently with two headline conclusions. One was simple. Retirees should buy more income annuities to supplement the other primary sources of assured income — Social Security and pensions.
As the GAO points out, “[a}nnuities provide income at a rate that can help retirees avoid overspending their assets and provide a floor of guaranteed income to prevent unnecessarily spending too little for fear of outliving assets.” Moreover, “[a]nnuities can also relieve retirees of some of the burden of managing their investments at older ages when their capacity to do so may diminish….” That’s why they make so much sense for so many people. Sadly, they are rarely purchased. Economists call this disconnect between what retirees should do and what they actually do the “annuity puzzle.”
4. Taking Social Security Too Soon. A worker at the full retirement age of 66 who is entitled to a monthly Social Security benefit of $1,000 has that benefit reduced to $750 per month if benefits begin at age 62. If that same worker waits until age 70, the monthly check increases to $1,320 a month. Monthly benefits received at age 70 are increased by at least 32 percent compared with taking them at age 66. But this is a choice that is rarely selected. In fact, nearly three-quarters of people begin taking Social Security payouts prior to age 65. Deciding when to take benefits depends upon a variety of factors, but it usually makes sense to wait, as the recent GAO study referenced above shows (that was the second headline conclusion). The Social Security Administration offers a benefits calculator here.
Obviously, delaying Social Security is good advice for those who can afford it or who have up-to-date skills and good health. In 2010, more than 29 percent of Americans aged 65 to 69 worked at least part-time and nearly 7 percent aged 75 or older were employed. But simply working longer is not always an option as the vagaries of health and the job market cannot be controlled. Sadly, the real picture does not always look like that depicted in retirement planning commercials.
5, Not Having a Plan. A retiree without a carefully thought-out plan can easily be too aggressive or too risk-averse with respect to investments and related subjects. Only a well-constructed plan with clear parameters and expectations can provide the foundation necessary to make the best possible decisions and to provide the highest chances for success.
According to the 2011 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, only 42 percent of Americans have actually calculated how much money they’ll need to save for retirement. An equal percentage of Americans simply guess at this amount — and they usually guess way too low. The EBRI study also showed that those who calculate how much money they will need are more confident about their ability to retire. For help, check out Choose to Save, a non-profit program from EBRI that offers a simple online calculator to help you with these calculations. These data points focus on pre-retirees, but retirees need to plan too, if for no other reason than to make sure they are on the right track. The sooner a problem is discovered, the easier it is to correct.
Planning properly can pay big dividends. Invest your time — as well as your money — wisely.