Considering the stock market’s wild swings over the last two weeks, some investors may be a bit queasy. Those who are newly retired or near retirement may be tempted to cash out of stocks or adjust their portfolio so that it is mostly invested in bonds. That could be a big mistake.
That’s one of a few mistakes that can derail your retirement plans.
Mistake: Boosting bond allocations at retirement.
With extraordinary low interest rates and modest inflation, investing in long-term bonds to capture as much yield as possible may seem like a smart move. But the years leading up to retirement tend to be your highest-earning years and an allocation to equities can boost your retirement portfolio.
Also, as interest rates rise, bond yields fall. “With interest rates poised to rise over the next few years, a large allocation to bonds, especially now, may result in significant capital loss,” said Hardeep Walia, CEO of Motif Investing.
He suggests adding exposure to equities that do well in a rising rate environment.
There is also no guarantee that inflation will stay benign.
“The extra reward you get in the form of higher yields from stretching on maturity will come back to haunt you should inflation trend upwards faster than expected,” said financial advisor Manisha Thakor, director of wealth strategies for women at The BAM Alliance. “For many people, the only way to keep assets growing enough to not only beat inflation but hopefully grow in real terms is to take on some equity risk.”
Mistake: Counting on Medicare to cover all health care costs.
Another common mistake is assuming the government will pay for one of your biggest retirement expenses: health care.
Qualifying for Medicare does not mean your health-care expenses will be covered. Medicare helps to pay for hospitalizations, doctor visits and prescription drugs, but people on Medicare generally still pay monthly premiums for physician services and prescription drug coverage.
Also, Medicare does not cover long-term care services, routine dental visits or vision care. According to a Kaiser Family Foundation study published in 2014, the average Medicare beneficiary paid $4,374 in 2010, including premiums and out-of-pocket costs. To check whether a medical expense is covered, go to medicare.gov. Make sure you’ve saved up to cover those costs.
Mistake: Moving to a state for the low income taxes.
If you don’t have enough savings, maybe you’ve decided it’s not a big worry because you are planning to move to a state with low or no income tax, so your overall tax hit will be lower. Not so fast. That’s another big mistake.
Don’t make a move just because of taxes. Many low-income or no-income tax states have high property and sales taxes that can eat into your savings.
“States have to finance themselves. So some states don’t do it through income taxes, which makes them attractive, but they have lots of other ‘nuisance’ taxes,” said tax advisor Ed Slott, author of “Fund Your Future: A Tax Smart Savings Plan in Your 20s and 30s.” “Somewhere you pay for a lifestyle. It may not show on the income tax but will show up when you go to the movies, or buy something else. When you add up the taxes you pay throughout the day, it may be as much as you would have paid in state income tax. Nothing is totally free.”
If you move far from family and friends, you may also have to dip into your nest egg for travel costs.
Mistake: Not saving enough for retirement.
Not saving is the No. 1 retirement mistake. “Not putting away enough money is the biggest mistake people make,” Slott said. “Wherever you are, it’s not too late to save. You won’t have anything if you don’t put something away.”
How much do you need? It will vary depending on your lifestyle.
But consider this. Suppose you worked from age 25 to age 65. That’s 40 long years. Now assume you live to 95. That’s 30 years in retirement. Think about that. For every year you worked you needed to fund one year of current living expenses and set aside enough funds (either through your contribution to Social Security or outright retirement savings) to cover another three-fourths of a year of expenses in retirement.
“That math is absolutely mind-boggling. As a result, many people are heading into retirement with a little less (or a lot less) than they’d like, to have reasonably high odds of not outliving their money,” said Thakor.
So save even more money than you think you may need. The amount that you save may be even more important to making sure you don’t outlive your money than where you invest those dollars.