Are You Making Retirement Decisions Now That Can Jeopardize Your Financial Plan?
I have talked to clients nearing retirement age that are starting to panic after hearing the headlines every day on the news. Many of them are considering making decisions that could have significant ramifications to their financial plan in retirement. Here are some of the most common potential mistakes people are making in response to the coroanavirus epidemic.
Claiming Social Security Too Early
- Although you are entitled to claim Social Security at age 62, you may want to wait if you can afford it. Most financial planners recommend holding off at least until your full retirement age before tapping into Social Security. If your full retirement age is age 67, claiming at age 62 results in a reduction of 30% of your benefits for the rest of your life. If you can hold off, you can receive a boost of 8% between the age of 67 and 70 due to delayed retirement credits. There are no additional delayed retirement credits after the age of 70. Claiming strategies can vary for couples, widows, divorced spouses and individuals, and need to be customized to your unique financial situation. Some clients are considering retiring early and taking social security because they are concerned about potential pay cuts or layoffs, but once this decision is made, your benefits are permanently reduced. It is a good idea to consult your financial advisor to see if this is the best course of action, or if there are alternative strategies that make more sense.
Relocating on a Whim
- Being stuck at home in colder weather is no fun. Many of us dream of relocating to a different area since we can't schedule a vacation. The best advice I can give you is to consider renting before buying. Many people relocate to a new destination and find out that their dream destination is more of a nightmare. Sometimes they have not considered how the new state taxes their retirement income, and although property taxes may be lower, the state income tax more than makes up for it. Also, sometimes the places that are great vacation spots are not ideal for day to day life. It is a good idea to take the time to consider the cost of relocating, as well as the qualify of life.
Planning To Work Forever
- Many people are looking at their portfolios now and are thinking that they can never retire. They may decide that the best decision is to plan to work as long as they possibly can and they spend as if their wage income will continue indefinitely. According to the Transamerica Center for Retirement Studies, 53% of workers expect to work beyond age 65 to make ends meet. While more than half plan to work past age 65, only 20% of Americans age 65 and over are actually employed, according to the US Department of Labor Statistics. You could be forced to stop working due to health issues for you or your spouse, layoffs or downsizing. Only 28% of baby boomers surveyed by Transamerica have a backup plan to replace retirement income if they are unable to continue their employment.
Taking A Distribution From Your 401K
- The CARES Act recently announced that you are able to take a distribution of up to $100,000 from your retirement plan, to be paid back over a period of three years. This sounds like a great solution to short term cash flow needs, but this money was contributed to help you during your retirement years, and will not grow as it should to help you meet your goals. In addition, if you leave the company prior to repaying this loan, the entire amount becomes due immediately. And there are tax consequences for failing to repay the distribution as well. In addition, many people taking the distribution may then suspend their contributions, and could have difficulties meeting their retirement planning goals.
Trying to Time The Market
- If your portfolio was properly constructed, you should not have to sell during this market decline. Diversification means that you are less susceptible to a sharp drawdown in any one type of investment. When one investment type does well, another less correlated investment should react differently. Your portfolio should have enough in liquid assets and fixed income to get you through times like this. If you cash out while the market is down, and try to buy in later when the economy improves, you are doing the opposite of what you should be doing, and emotional investing has proven to be detrimental to your long term returns.
Before you make a decision that you may regret later, please consult a financial planner to help you make sense of your financial situation.
About the Author
Patti Hughes is a Chicago Fee-Only Financial Planner. Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions. She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.