With so much uncertainty in the air these days, particularly with regard to the future of financial markets, it can be hard for some to believe that there are people out there heading into retirement. Certainly the future for retirees looks to be pretty rocky.
But whether your retirement has been planned for years or whether you’re forced out, taking a buyout or an early out, there are a few important things you have to keep in mind to keep from jeopardizing your retirement security. Here are four common mistakes that many people nearing retirement make.
1. Not Paying Down Debt Before You Retire
The power of compounding interest has often been referred to as the eighth wonder of the world. But while it can be a powerful benefit when working in your favor, it can be incredibly destructive when working against you.
Households in America today are more indebted than ever, and many a retiree enters retirement carrying a significant debt load. While in some cases those debt loads can be manageable, often times they aren’t.
That’s particularly true with credit card debt, which often carries incredibly high interest rates. But even mortgages and auto loans can weigh heavily on you in retirement, especially if your investments aren’t performing as well as you expected.
Many retirement advisors assume that assets in retirement will grow at around 3-4% per year. But if markets have a bad year and you lose money, your debts become even larger in proportion to your assets.
And if your assets only grow at 1-2% per year, while your debts continue to add 4-5% or more every year, you’re slowly whittling down your nest egg. That could significantly hamper your ability to support yourself later in retirement, which is why retirees should strive to pay down as much debt as possible before they retire.
2. Making a Big Move Without Planning
Many retirees see retirement as the opportunity to live the life they always wanted to live. They might want to pick up and move across the country, or move to somewhere with better weather or a more relaxed atmosphere. But that comes with its own set of issues.
First, there’s the cost of moving. If you’ve been living in the same place for decades, you may not be fully aware of just how much stuff you’ve accumulated. You probably also aren’t aware of how much it costs to hire movers. Between movers, storage units, and rental trucks, you could spend thousands of dollars making a move.
Then there’s the question of where you decide to live. Many retirees decide to downsize, moving to a smaller house or into an apartment. But leaving a place you know for a new home means that you could be opening yourself up to additional expenses. Imagine moving into a new, smaller house and having to replace the HVAC, furnace, or roof within the first five years you’re there. That could really cost you.
3. Taking on Additional Liabilities
The choice of where to move comes with its own impacts on your finances, too. Be sure to consult with a trusted tax advisor before you move or change residency. You may look enviously at some states that don’t have state income taxes, but have you thought about property taxes, sales taxes, homestead exemptions, and issues related to estates and trusts? If you aren’t careful, you could be exposing yourself to thousands of dollars in additional tax liabilities each year.
You also want to be careful about how you spend your money, since you won’t have any income coming in to help you recoup your losses. That means resisting the urge to help out friends and family, too. Yes, you may want to help your grandchildren pay for college, but is it worth risking your retirement security to do that?
Just because your retirement accounts are flush with cash now doesn’t mean that they always will be. Helping your heirs by having money left over when you pass may do them more good than dipping into your retirement savings while you’re still alive.
4. Not Diversifying Your Investments
You may think that if your investments have brought you this far, why change a strategy that isn’t broken? That can be an especially tempting thought if you haven’t made changes to your investment strategy in years. But as you get closer to retirement and into your first years of retirement, the importance of protecting your retirement savings against sudden losses becomes more important than maintaining the potential for large gains.
When you’re younger, big losses can be overcome by two factors: time and income. You have years or decades ahead of you to recoup losses or see stock prices recover, and you have years or decades of additional income that will be able to be used for investment purposes. Once you’re nearing retirement, however, those two factors both start working against you.
You no longer will have time to make up for big losses because your expenses will continue taking a bite out of your retirement savings. And you won’t have income coming in to help smooth over those losses either. That means managing the risk profile of your investments is critical, and proper diversification can help with that.
Diversification doesn’t mean just investing in a wide array of stocks and bonds either. It means investing across different asset classes, making sure that your investment portfolio isn’t too strongly exposed to any particular industry, asset class, or region of the world. And for many investors, diversification means investing in gold.
Gold’s ability to maintain its value over the long term makes it a favorite of investors looking tor long-term stability and decreased risk in their investments. Its tendency to perform well during bear markets makes it a favorite for those looking to hedge against the risks of stock market crashes. And its potential to gain value in the face of inflation and financial crisis has many investors taking another look at gold.
With a gold IRA, investors can roll over existing retirement assets from tax-advantaged retirement accounts into a gold investment. That gives them the same tax advantages as they had in their 401(k), 403(b), or IRA accounts, but with the added benefit that they can now invest in physical gold coins or bars. For investors who need to diversify but haven’t, they owe gold a second look.
This isn’t by any means an exhaustive list of retirement mistakes to avoid, but hopefully this list can help you when it comes to your retirement planning. The biggest fear many investors have is running out of money in retirement. By avoiding some of the mistakes that others have made, you can go a long way toward safeguarding your retirement security.