Americans focus a great deal of time and attention to saving for retirement. However, all that saving and planning could be in jeopardy if you don’t make the right decisions once you actually get to retirement. Cherrie Boyer, a Financial Planner with Wamhoff Financial Planning and Accounting Services, points to the top three financial mistakes made in retirement and offers advice for how to avoid those mistakes.
Mistake 1: Not Hiring a Professional
- Hiring a professional that is knowledgeable in taxes and able to help with 401(k) rollover and the retirement process is essential.
- Upon retirement, you still have a long way for your money to go, so you have to continue investing, but in a way that is appropriate for your situation
- Many retirees will take all of their money and put it into what they think are “safe” investments. But they must be aware that the returns on many of these so-called “safe” investments aren’t even keeping up with the rate of inflation.
- Advice to avoid this: it’s just as important in retirement to be diversified into the mix of investments that will help prolong your money. That mix may be different than it was when you were still working, but it’s still important to look both inside and outside the market to determine what’s best for your unique situation. And, don’t get too conservative or you may run out of money.
Mistake 2: Taking Out Too Much Money When You Retire
- When people reach retirement, they feel “rich” because they now have access to the money they’ve been saving for so long
- There is a tendency to withdraw money for things like extravagant trips, cars, or hobbies early in retirement.
- There could be tax consequences to taking large withdraws
- While you may feel rich in the beginning, you have to remember this money has to last your entire life, and it’s quite possible you’ll live to 95 or older
- Advice to avoid this: make a plan before you retire for how you are going to take withdraws from your accounts – how much, how often, and from which accounts to minimize tax implications. Hire a professional who does distribution planning and has been successful.
Mistake 3: Withdrawing from Qualified Accounts before Non-Qualified Accounts
- All money is green and spends the same way, but different funds have different tax implications when you withdraw from them.
- A non-qualified account includes investments that have already been taxed or partially taxed. This could include stocks, bonds, REITs or other investments not made with pre-tax dollars.
- A qualified account is an investment made with pre-tax dollars, including your 401(k), pension, or traditional IRA’s.
- Advice to avoid this: always withdraw money from investments that have already been partially taxed first. This will lessen your immediate tax burden, and allows for investments in the qualified accounts to continue to compound.