It’s estimated that nearly 4.1 million people reach age 65 yearly in the U.S. Since most people retire between the ages of 63 and 65, this means some pretty big life changes. For most people, it means the end of an income as they know it and the need to adjust to more of a fixed income. This can mean some substantial adjustments to your way of living, especially if you are not prepared.
In this article, we’ll share some of the most common financial mistakes people make when preparing to retire. And more importantly, we’ll give you insights into how to avoid making those same mistakes for yourself.
Retirement Planning Means Planning Ahead
As you approach retirement, making smart financial choices becomes more important than ever. However, many pre-retirees unknowingly make mistakes that can impact their retirement years. By understanding these common pitfalls, you can take steps to avoid them and set yourself up for a more comfortable retirement.
1. Underestimating Healthcare Costs
One of the most common mistakes pre-retirees make is underestimating the cost of healthcare in retirement. Many people assume Medicare will cover all their expenses, but this isn't always the case.
While the numbers vary across sources, the average retired couple could face about $315,000 in healthcare related expenses during their retirement years. That's quite a substantial sum. And the truth is that out-of-pocket costs for premiums, copayments, and uncovered services can add up quickly. To avoid this mistake, it's important to research your healthcare options and consider supplemental insurance or a health savings account (HSA) to cover unexpected costs.
2. Failing to Diversify Investments
Another mistake pre-retirees often make is not diversifying their investments. Some may have too much money in low-risk accounts like savings or CDs, while others might be too heavily invested in stocks. Either extreme can be risky.
To avoid this mistake, review your investment portfolio and make sure it's balanced. A mix of stocks, bonds, and other assets can help you protect your nest egg while still allowing for growth.
3. Not Having a Solid Retirement Plan
Many pre-retirees enter retirement without a detailed financial plan, thinking that their savings will be enough. However, without a clear plan, it can be easy to overspend or miss out on opportunities to grow your savings.
To keep this from happening to you, work with a wealth management advisor to create a retirement plan that includes your income sources, expenses, and long-term goals. A good plan can help you stay on track and adjust as needed.
4. Claiming Social Security Too Early
It can be tempting to start claiming Social Security benefits as soon as you’re eligible at age 62. However, doing so can significantly reduce your monthly benefit. Many pre-retirees don't realize that waiting a few years to claim benefits can result in higher payments.
For example, if you retire in 2024 at age 62, your maximum benefit will only be $2,710 per month. However, if you wait until age 70, your monthly benefit could be as much as $4,873. To get as much social security benefit as possible, consider waiting until your full retirement age or even later. This strategy can increase your benefits and provide more income during retirement.
5. Ignoring Inflation
Inflation is often overlooked when planning for retirement. Over time, the cost of living tends to rise, meaning your savings might not go as far as you expect. Make sure your retirement plan accounts for inflation. This might mean adjusting your investment strategy to include assets that tend to keep up with inflation, such as certain stocks or real estate.
6. Not Preparing for Long-Term Care
Many pre-retirees neglect to plan for the possibility of needing long-term care. Though healthy lifestyle choices can reduce the likelihood that long-term care will be needed, it isn’t a guarantee. This can be a costly oversight, as long-term care services can quickly deplete your savings.
It is so important to explore options for long-term care insurance or other ways to cover these potential costs. Planning ahead can protect your assets and provide peace of mind.
Securing Your Retirement: Avoiding Financial Pitfalls
Avoiding these common financial mistakes can help you secure a more comfortable and stable retirement. By planning ahead, diversifying your investments, and being mindful of potential risks, you can build a strong foundation for your golden years. If you're unsure about any aspect of your retirement planning, contact us at Hilltop Wealth & Tax Solutions today.