Heading to Job Sunset soon? Whether you’ve been planning your exit from the workforce for decades or just decide on a whim that you’re ready to rush out the door on your 60th birthday (or wait until you’re 67), you want to make sure you don’t make common mistakes.
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Since the mid-1990s, the average retirement age has increased from 62 to 64 for men and from 60 to 62 for women, according to the Center for Retirement Research at Boston College. This trend of late retirement has occurred for a variety of reasons, according to research from the Center. The trend in later retirements can be attributed to changing incentives in social security and employer pensions. In addition, better education and health, less arduous jobs and the decline in health insurance for retirees have also raised the retirement age.
However, it is possible to make a few mistakes on the eve of retirement. Let’s explore a few common ones.
Mistake 1: Thinking that your investments should automatically become more conservative.
You might think that you need to invest heavily in bonds or other fixed income assets as soon as you plan to retire, but that could be a mistake. At 60, you might still have a 30-year time horizon at your fingertips. Why not keep most of your money in stocks and let it work in your favor as an inflation hedge?
In fact, consider dividend-paying stocks for a big producer of retirement income. Dividend stocks pay a dividend, which means that a company gives you money for your stocks, for example, on a quarterly or annual basis.
Dividend stocks can certainly help replace your income when you stop working. They also avoid volatility, unlike common stocks, as companies that pay dividends are generally established and financially secure companies.
Mistake 2: Not understanding RMD.
Have you taken the time to understand the Minimum Distributions Required (RMD) for your various accounts? RMD refers to the amount of money you need to withdraw before a certain age.
You must start withdrawing withdrawals from your IRA, SEP IRA, SINGLE IRA or pension plan when you reach age 72 (70 ½ if you reach 70 ½ by January 1, 2020). Roth IRAs do not require any withdrawal before your death and provide a great opportunity to leave money to your heirs.
You can probably imagine what happens if you don’t withdraw the full RMD amount by the applicable deadline, but the tax is huge. You will be slammed with a 50% tax hit.
By the way, you also need to make sure you fully understand the SECURE Act rules mentioned on the IRS website. If you contributed to a defined contribution plan or an individual retirement account (IRA), your heirs must distribute your entire account balance within 10 years or face tax consequences.
Mistake 3: Not looking in long term care insurance.
Yes, yes, it looks like a real brake, doesn’t it? As a healthy individual, planning for a nursing home or assisted living facility can seem like a leech on the enthusiasm you’ve built up about retirement. However, this is precisely the moment when you should examine it – when you are healthy.
The median monthly costs for a semi-private room in a nursing home are $ 7,756 and $ 8,821 for a private room. Of course, that depends on where you get care, the geographic location of the care you receive, and the level of care you need, according to Genworth’s Cost of Care survey.
If you suddenly realize that you need long-term care insurance at age 80, you won’t be able to get it. You are even better off getting it in your fifties. If it’s too late for you to find a police, pass this wisdom on to your children.
Mistake 4: Saying out loud, “Social Security and Medicare will work out on their own.” “
Oh no no.
You want to know exactly how much you will bring with social security. You can start collecting Social Security retirement benefits as early as 62, but if you wait longer you’ll get a bigger check, especially if you wait until you reach full retirement age. Waiting until age 70 to collect Social Security will give you the biggest monetary advantage.
You also want to know exactly what you’ll pay for health insurance, including premiums, deductibles, co-payments, and more. It’s not free, and when you live on a fixed income, insurance costs can make a bigger dent than you might think. Find out the costs of Medicare. You may also need to seek an additional insurance plan, so consider your options as well.
Mistake 5: Not increasing your emergency fund.
Think you’re happy with a Full IRA or 401 (k)? You still need an emergency fund for those “what ifs”.
Have you ever heard of the 4% rule? Experts recommend that you don’t withdraw more than 4% from your retirement accounts, which suggests that this is the safest amount you can withdraw and that there is enough left over for the duration of your retirement. You will even have to withdraw more in subsequent years to keep up with inflation. That 4% won’t cover everything, especially because you’re not going to be withdrawing all of your pot of gold right away.
You should always have an emergency fund on hold for situations like having to tow your car to a dump (and therefore need a new one) or other types of situations that arise.
Mistake 6: Not having a plan.
My God, you’ve planned your whole life to get this far. It seems such a bummer having to plan your retirement diligently, right?
However, not having a plan can cause you to not have enough money in retirement, or cause you to experience a shortfall in your health care, or more. It is very important to make sure that you will not run out of money in retirement.
Calculate the rate of return you need on your investments, the level of risk you need to take, and the amount of money you need to withdraw from your portfolio.
Point your I’s and cross your T’s
It is also important to remember that you can rotate at any time during the retreat. You can choose a side business if you feel you need a higher retirement income. You can reinvest your money to invest in dividend paying stocks. You can sell your house and downsize. However, as you approach your sixties, you should have a very clear idea of how you will deal with all of the above factors.
Consult a financial advisor for great advice if you’re not sure you can confidently say you’re avoiding the common mistakes above.