Year-end planning errors retirees should avoid
Year end is a great time to make sure retirement savings strategies are optimized. Looking back at past performance and considering plans for the year ahead can reveal areas where investing must be rebalanced. This year may require more adjustments than most as the U.S. economy prepares for changes expected from the recent presidential election.
For retirees revisiting their plans and advisors guiding them, here are a few factors that should be closely considered.
Sequence of return risk on retirees
Retirement math is relatively simple during the accumulation phase. It involves starting early, saving often, and enjoying the returns of long-term investing. However, other elements can affect the equation once a retiree starts drawing from their funds. Sequence of return risk is one of those elements.
The ideal situation involves starting your retirement during a period of positive market returns. In that case, retirees can draw a healthy amount from their accounts and still experience healthy gains on what remains.
Sequence of return risk refers to the possibility that retirement will start during a period of negative market returns. When that happens, withdrawals from retirement accounts can easily lock in the losses that markets are experiencing.
For those scheduled to enter retirement during a down market, mitigating the risk can involve putting off withdrawals until markets recover. For those still in the planning phases, flexibility is the key to mitigating the risk. Having a short-term stash of cash that can sustain the retiree’s lifestyle during down markets is one way to stay flexible. Leveraging a variable withdrawal rate can also keep losses to a minimum.
Social Security math trap
One of the decisions involved in retirement planning involves when to begin taking Social Security payments. Although eligibility begins at age 62, payments can be delayed. The advantage of waiting is that benefits increase each year.
For those who can wait, delaying payments would seem like the obvious choice. The math, however, is not that simple.
Delaying payments typically means living off savings until payments kick in. That course will pay dividends, provided retirees are able to enjoy a long retirement. The problem is no one knows how long retirement will be.
Social Security can be a math trap because payments stop when the retiree and their spouse die. Even if it has only been a few months, death discontinues the payments. When retirees use their savings to delay Social Security, they spend money that could go to their heirs after they die.
Finding the right balance between increased Social Security payments and the savings spent to gain them is tricky. As retirement gets closer, however, it may be easier to determine. Taking time at year end to evaluate your current circumstances and assess the benefits of higher payments can help guide decision-making.
The emotional component of retirement
One key error retirees can make when planning is focusing all of their attention on finances. Although having enough money is important, that alone won’t be enough to build a happy retirement. Retirees must also consider and plan for the social and psychological aspects of retirement.
Walking away from work routines and work-related relationships can leave a retiree feeling purposeless and disconnected. At that point, boredom, loneliness and depression can creep in, and they are issues that no amount of money can fix. To ensure you live a fulfilling retirement, map out meaningful ways you’ll fill your time. Retirement should be about enjoying life, not just managing your portfolio.
Conducting an annual review of your retirement plan helps to keep it focused on your goals and optimized for the current economic landscape. By taking time during the review to address these three potential errors, retirees can ensure they enter retirement energized and empowered.
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Aaron Cirksena is founder and CEO of MDRN Capital. Contact him at [email protected].
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