Retirement Mistakes: Ranked

This episode of MPB's Money Talks originally aired July 10, 2018 and will be available online at http://www.mpbonline.org/moneytalks/

I have a few usual comments to make before we dive into this. I have said this before and will say it again, 90% of the personal finance information that you find on the internet is wrong or harmful, the other 10% was not tailored for you. I hope this blog falls in the 10% which is fine advice but not personalized to you. You can read excellent advice on the internet, but if you don't apply it well to your situation, it won't be good advice for you.

This article is originally from Kiplinger, which has its fair share personal finance advice in the 90% category. This article, which we used as inspiration on the radio, had some useful tips. The article is Fourteen Retirement Mistakes You Will Regret Forever. While the title is pretty forbidding, the actual mistakes can fall into a few broad categories:

• Failure to plan.
• Calculation mistakes.
• Getting scammed or spending too much.

On the radio, we tried to talk about what the most important things to avoid were, so I will give a rough ranking of:

1. Important for everyone!
2. Varies with your situation.
3. Doesn't matter so much.

Lets have a look at what Kiplinger thinks you will regret forever...

Relocating on a Whim 

The lure of warmer climates has long been the siren call of many who are approaching retirement. So you're cooking up a plan to head south to Florida or one of the many other great places to retire if you hate the cold.  

Our advice: Test the waters before you make a permanent move.

I would rank this a 1. The important thing here is that you need to plan ahead for this sort of thing. Moving is expensive and hard to reverse (well, expensive at least). People often think about moving or downsizing when they retire but the numbers may not work out unless the savings are significant or the change in atmosphere is perfect. The recommendation here to test the waters, say, by taking an extended vacation or checking out a location in more than one season makes a lot of sense. Of course, check the numbers to make sure they work too.

Falling for Too-Good-To-Be-True Offers    

1! This is important! Nobody should fall for scams! The article gives some general pointers about reporting scams as well.

If you fall victim to a scam, it is important that you report it. It may be very embarrassing, but the information that you possess can save others from falling victim and possibly even lead to the capture of the perpetrators.

Planning to Work Indefinitely 

Many baby boomers like me have every intention of staying on the job beyond age 65, either because we want to, we have to, or we desire to maximize our Social Security checks. But that plan could backfire. 

Consider this: 53% of workers expect to work beyond age 65 to make ends meet, according to the Transamerica Center for Retirement Studies. Yet, you can't count on being able to bring in a paycheck if you need it. While more than half of today's workers plan to continue working in retirement, just 1 in 5 Americans age 65 and over are actually employed, according to U.S. Department of Labor statistics.

This one may seem surprising. After all, working and making money should be a good thing in retirement, no? I give this a 2, it will depend on your situation more than others. The important consideration here is that you have a good plan. They want to emphasize that if you plan on working forever, you are running the risk of being fired or no longer able to work for any number of reasons (including because you have to take care of someone else!). This can be mitigated, of course. If you do plan on working forever, just have a plan in place if you cannot continue working.

Putting Off Saving for Retirement

This is the most important thing. Number 1! Don't forget to save for retirement. This is the number one problem. Of course the amount you need to save varies with your income, but it is never too early to start. If you feel you have waited too long, just start.

Borrowing From Your 401(k) 

Taking a loan from your 401(k) retirement-savings account can be tempting. After all, it's your money. As long as your plan sponsor permits borrowing, you'll usually have five years to pay it back with interest.

Before borrowing from a 401(k), explore other loan options. College tuition, for instance, can be covered with student loans and PLUS loans for parents. Major home repairs can be financed with a home equity line of credit.

I'd rate this a 2. It comes down to the calculation. Firstly, only borrow from your 401(k) if you really need to. But if you really need to, it might be one of your best options. The rates are generally lower than credit card, medical or personal loans, and the interest gets paid back to you. Its not exactly the worst thing ever. They are often limited to small amounts so you can't wreck a financial plan doing this. Borrowing from is vastly cheaper than withdrawing from a 401(k) when you consider the cost of taxes.

I wouldn't totally disregard this, but do check the numbers to make sure it makes sense. Also, the article does note that there are other borrowing options which may be more appropriate depending on what you need the money for.

Decluttering to the Extreme 

My parents are in their mid-80s and have been living in the same house for decades. In recent years they have started getting rid of all the bric-a-brac they've accumulated. Their goal is either to sell and move into a retirement community or, at the least, make it easier for my brother and I down the road when we inherit the home. 

Be careful about what you throw out in haste. Sentimental value aside, certain professionals including doctors, dentists, lawyers and accountants can be required by law to retain records for years after retirement. As for tax records, the IRS generally has three years to initiate an audit, but you might want to hold on to certain records including your actual returns indefinitely.

I wouldn't worry to much about this. This is a 3 - low priority. Yes, I agree that you shouldn't be throwing away things that you are legally required to hang on to, but make a digital copy of important records and dump the rest is not a bad policy. They note that an important reason to declutter is to make things easier on your children when you pass. Not only will your children not want most of your stuff (probably) they might also have no clue where or what things are! Get rid of what you don't need. It can ease things a lot down the road.

Putting Your Kids First 

Sure, you want your children to have the best — best education, best wedding, best everything. And if you can afford it, by all means open your wallet. But footing the bill for private tuition and lavish nuptials at the expense of your own retirement savings could come back to haunt all of you.   

This is important! Number 1 priority! If you thought that raising a child was expensive, wait until you are still supporting your adult children. Spending a large lump sum on your children college or wedding or home or car or life can put a big dent in your accounts and continuing to support them after they have grown to some sort of independence can drain your paycheck of any possible savings.  This is a classic "spending too much" mistake.

Buying into a Time-Share

Time-shares are scammy. See "too good to be true" above. These can be expensive mistakes. While there are legitimate time shares that work well for peoples lifestyles, there are more nightmare stories than you can count.

Avoiding the Stock Market 

"Conventional wisdom may indicate the stock market is 'risky' and therefore should be avoided if your goal is to keep your money safe," says Elizabeth Muldowney, a financial adviser with Savant Capital Management in Rockford, Ill. "However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation."

This is important! 1! The above paragraph sums it up well. People often fear the risk of the stock market but instead take on the real long term risk of not being able to meet their financial goals.

Ignoring Long-Term Care 

When the day arrives that you or a loved one does require long-term care, be prepared for sticker shock. A 2017 Genworth survey found that the national median cost of assisted living is $45,000 a year; a private room in a nursing home, $97,455 a year. Even a sizable retirement nest egg can be wiped out in a hurry. And remember, Medicare doesn't cover most of the costs associated with long-term care. 

There are options for funding long-term care, but they're pricey. If you can afford the high premiums, consider long-term care insurance, which covers some but not necessarily all nursing home costs. A typical policy for a 55-year-old male might start at $2,000 a year, according to Genworth. The annual premium jumps to $3,000 if the man waits until 65 to buy a policy. You can also look into purchasing a qualified longevity annuity contract, known as a QLAC. In exchange for investing a hefty lump sum up front when you're younger, the QLAC will pay out a steady stream of income for the rest of your life once you hit a certain age, typically 85.

This is a number 2 priority and it really depends on your situation. Some people will fall onto the support of medicaid when they need it and some people will be self insured. Think of long-term care as consuming your last dollars, and how many it will consume. Long term care insurance protects the assets you do have from being spent in your final days. If you have plenty to cover the expense anyway, you may not need the insurance. If you don't have much at all, you may lean on medicaid for your last years. In between those? Long term care can protect your assets and provide for your comfort.

Neglecting Estate Planning 

Estate planning isn't just for the wealthy. Even if your assets are modest — perhaps just a car, a home and a bank account — you want to have a valid will to specify who gets what and who will be in charge of dispersing your money and possessions (a.k.a. the executor). 

Estate planning is a HUGE topic. It is also VERY important for pretty much everyone. This is a number 1 priority. Estate planning is more than just instructions. It is untangling complex ownership structures, relationships and assets. Don't leave this task to someone else when you die, make it clear what you want to happen before then.

Borrowing Against Your Home 

Rather than borrow against the value of your home, explore ways to lower your housing costs. Start with downsizing. Sell your current home, buy a smaller place in the same area, and put your profits toward living expenses. For the ultimate in downsizing, consider a tiny home for retirement — seriously. Tiny homes are inexpensive, upkeep is easy, and utility bills are low. If you're willing to relocate, sell and move to a cheaper city that's well-suited for retirees. Or, stay put and find a roommate. The rental income will supplement your Social Security and savings. 

If you must tap your home equity, tread carefully. If you still have a mortgage, look into a cashout refi. Just try to keep the length of the refinanced mortgage to a minimum to avoid making repayments deep into retirement. Otherwise, investigate a home equity loan or home equity line of credit (HELOC). However, be forewarned that under the new tax law you won't be able to deduct the interest on these loans unless the money is used to substantially improve your home, such as replacing the roof. In the past the interest could be deducted even if you spent the money on, say, a vacation or a new car. Yet another option for retirees is a reverse mortgage. You'll receive a lump sum of money or access to a line of credit that in most cases doesn't need to be repaid until you or your heirs sell the home.

This is tricky and comes down to calculations. If you need to borrow money, it is a matter of figuring out the best way to get the money. If you need to reduce your living expenses, raising your borrowing is probably the wrong way to go. The article mentions downsizing and even tiny homes as part of the solution. If you have been paying attention, I have already cautioned that might not be the best course of action. You need to look at those numbers carefully. If you move to a tiny nome, you better be prepared for living in a tiny home - that is a major lifestyle change for most people. Beware of reverse mortgages too.

Failing to Plan How You'll Fill Your Free Time

This shouldn't be too high of a priority, but I guess it was fun for the authors to throw in. Of course you need to figure out what to do in retirement, but you won't regret it forever if you just have to make it up as you go along.