According to a survey conducted last year, more than half of retired individuals have regrets about how they prepared for their post-work years. When asked about their top mistakes, a number of different themes appeared, from failing to pay off debts to not saving enough money in general.
Individuals who have not yet reached retirement, including those who have not yet even started saving, should pay close attention to these areas of concern. That way, they can avoid making the same mistakes.
Everyone has a unique situation that will affect the strategies that can be used to address these issues. Understanding what may become a problem can help direct planning. Some of the most significant mistake that individuals make when saving for retirement include:
1. Underestimating healthcare costs.
People need to think critically about the potential costs of healthcare they will face after retirement. Today, the average couple retiring at age 65 will spend nearly $300,000 on healthcare expenses. This does not include long-term costs. Thus, underestimating expenses can significantly reduce the amount of money individuals can spend on other goals, such as travel.
Individuals need to be smart about Medicare and choose a plan that will meet their needs, in addition to taking care of the programs that it offers. Many individuals forego the screenings and preventative care visits covered by Medicare. Taking advantage of these can keep people healthier and thus reduce overall expenses.
2. Neglecting a withdrawal strategy.
Many individuals become so consumed with saving that they forget to consider how to spend that money. When entering retirement, people should have a generalized plan for how they will draw down their nest egg. Making too many withdrawals can deplete one’s funds, but making too few can inhibit one’s enjoyment of retirement.
One rule of thumb is to withdraw about 4 percent of the nest egg in the first year and then adjust for inflation in the later years. With this strategy, the nest egg should last for about 30 years. However, individuals should consider this a rule of thumb and make adjustments to fit individual needs. Sometimes, people will vary their withdrawals based on how the market is doing.
3. Signing up for Medicare late.
While it may not seem like a big deal, signing up for Medicare late can actually have significant ramifications. Part B premiums can increase by up to 10 percent annually for each year that someone was eligible and didn’t enroll. These rates will then stay higher for the rest of their lives.
Individuals become eligible for Medicare when they turn 65. They have the three months leading up to and after their birthday month to enroll. People who are already receiving Social Security benefits are enrolled in Medicare automatically, but they should still check. Exceptions are also made for abroad volunteers or employees who have coverage through work.
4. Avoiding fixed annuities.
The benefit of a fixed annuity is that it provides virtually guaranteed fixed income, sort of like a pension, for the remainder of someone’s life. Many people avoid these investments because they do not understand them. However, adding one or two to a portfolio can significantly boost retirement income.
People may also want to look into deferred fixed annuities, also called longevity insurance, which kick in at a certain age. Retirees can use these investments to guarantee a monthly income as they grow older and may have significantly worn down the nest egg. Both of these investments can relieve the anxiety associated with a long life and help people enjoy retirement without worrying about money.
5. Claiming Social Security too early.
All American employees who have paid into Social Security can start taking benefits at 62. People can significantly increase their monthly income from the benefit by holding off until later. Financial planners typically recommend that people hold off until full retirement age at least, which is usually 67. Waiting until age 70 can be even better.
Someone who claims at 62 will receive a monthly check that is 30 percent less than the person who waiting until 67. Moreover, an additional 8 percent is added each year between 67 and 70. Thus, people who can afford to wait should. Notably, the benefits stop increasing once people turn 70, so at this point it makes sense to start claiming benefits.
6. Forgetting about long-term care needs.
Too often, people assume that they will not need long-term care, but the fact is that many individuals do. While people can buy long-term care insurance, this product tends to also be costly. This is due to the fact that this type of care is very expensive.
Currently, 52 percent of people turning 65 will need long-term care during their lifetimes for an average of 1.5 years for men and 2.5 years for women. Individuals with a lot of retirement savings or wealth may be able to pay for long-term care out of pocket. However, this is simply not possible for the average retiree.
Thus, long-term care insurance can prove an important, if costly, purchase. Buying it early, such as in one’s 50s, saves a lot of money.