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As a Certified Financial Planner, one of my most important jobs is to prepare clients financially for the unexpected. It’s easy for unforeseen costs to exhaust a hard-earned nest egg too quickly for convenience.
Most clients are keen to tackle issues that can arise when they spend more than they earn, or more than they think their retirement portfolio can handle.
But not all retirement mistakes are budget related. Here are the top three mistakes I see as a financial planner.
1. Not mastering Medicare
It’s no secret that one of the many dangers of a healthy retirement portfolio is the cost of health care. In fact, studies estimate that the average 65-year-old couple will need about $ 300,000 in after-tax funds to cover their health care costs in retirement.
The first step in tackling this astronomical cost and protecting your nest egg is learning how to navigate Medicare properly. Unfortunately, unlike the well-wrapped group policies prepared by your former employer’s human resources department, mastering Medicare will require you to roll up your sleeves or seek trusted advice.
An important tip for managing Medicare well is not to wait until the last minute to apply. When you first enroll in Medicare, your enrollment period can begin as early as three months before your 65th birthday, and will last for three months after that. Enrolling during your Initial Enrollment Period (IEP) allows you to avoid late enrollment penalties and enroll even with pre-existing conditions.
Fortunately, you don’t have to go through the process every year – Medicare Parts A, B, and D renew automatically. But it’s always worth checking your plan regularly to make sure you have adequate coverage at optimal costs. For example, the benefits of Part D, the drug plan, change every year, so it is essential to review this coverage during the annual fall election period.
2. Take social security too early
Over the past decade, Social Security headlines have dominated the mainstream media. Whether it’s estimating when trust funds should be depleted or whether retirees will receive a cost-of-living adjustment, Social Security plays an important role in America’s retirement system.
With Social Security making up around 33% of a retiree’s average income, the decision to start receiving your benefits should be made with care, especially since in most cases this decision will last for the rest of your life. .
Deciding when to take your Social Security retirement benefits is a personal decision unique to your cash flow needs and goals. Having said that, if you can afford to wait, I strongly encourage you to do so.
As Americans live longer and their life expectancies increase, deferring your Social Security benefits can improve your retirement income and protect you from the depletion of your assets and erosion of your nest egg due to the inflation, much like a deferred annuity. It’s also worth mentioning that you’ll avoid the hefty penalty for purchasing Social Security early at 62.
Plus, taking Social Security before retirement – when you’re still earning a salary and don’t really need it – may mean that some of your monthly benefits will be withheld. The income thresholds are quite low: $ 18,960 for single filers and $ 50,520 for those married and filing jointly. For every dollar earned beyond these limits, your benefits are reduced and dramatically: you will lose $ 1 in benefits for every $ 2 of income before full retirement age and $ 1 in benefits for every $ 3 of retirement. income in the year you reach retirement age.
The whole point of taking Social Security benefits early is actually receiving the income – so if you’re still working and earning those limits, it probably makes more sense to wait.
Navigating Social Security can be tedious, especially with the many moving parts it has. However, by getting a complete financial plan, you can model different scenarios to see how each decision will affect your current cash flow and the growth of your portfolio assets.
3. Not properly managing your fixed investments
In the historically low interest rate environment we have seen since the Great
, you need to be very careful not to get lazy when managing your fixed investments within your retirement portfolio.
Going too far down the yield curve (i.e. getting a long-term bond) can leave you vulnerable to large price swings if interest rates rise. On the other hand, staying short on the yield curve protects you more from price fluctuations, but your investments are unlikely to beat the rate of inflation.
Therefore, savvy investors who get creative and stay active with their fixed investments are reaping the benefits of this low interest rate environment.
Bond laddering is a proven fixed income strategy. This is the practice of staggering CDs or individual bonds over different maturity dates. Laddering bonds will minimize exposure to interest rate risk and increase the return on your fixed income portfolio by keeping a small portion dedicated to long-term maturities.
If you are an investor who can tolerate a bit more risk, you should consider adding dividend paying stocks to your fixed income portfolio. Although dividend paying stocks are stocks, they are generally less volatile than most other stocks. Plus, high-dividend-paying stocks tend to come from more mature companies with a long history of earnings and financial strength.
Finally, if none of these strategies are right for you, you might want to explore a Fixed Multi-Year Guaranteed Annuity (MYGA).
This annuity offers a guaranteed interest rate for a predetermined period (three to 10 years) and is backed by the full confidence and credit of the insurance company. They work very similar to CDs, but MYGA rates are generally higher. For example, by Bankrate, the highest three-year CD rate is currently 0.80%; meanwhile, the highest MYGA three-year rate is approximately 1.80%.
Preparing for the many pitfalls of retirement can be a daunting task. However, with hard work and the help of seasoned finance professionals, you too can avoid a financial crisis in your golden years – or at least be better prepared if it were to happen.