While many Americans have spent years planning for their retirements, a great many of them have made a basic discovery once they reach that plateau. Namely, that there are some issues that simple math and time will not necessarily resolve. If you are near retirement or have retired, here are several common mistakes that occur in the arena of financial planning for seniors that you can plan now to avoid.
• Underestimating your life expectancy – a generation ago, it was probably safe to assume that men would live to approximately age 70, and women to perhaps 75. But advances in medical science have pushed those ages up at least fifteen to twenty years. Realistic financial planning for seniors should probably assume that at least one spouse will live to age 90 or beyond. To make sure your money lasts, you may need to annuitize your assets to create a sufficient income. Consult the annuity calculator for estimates.
• Thinking that you'll be able to retire when you want. In financial planning for retirement, many workers plan on working into their 70s-until illness, disability or mere fatigue forces them to reconsider. If you plan on working past the normal retirement age, do not count on the extra money earned to pay for essential expenses. Sound financial planning for senior years would have you save a sufficient nest egg by age 65 in case health reasons prohibit you from working longer.
• Neglecting to adequately factor in health care costs – failure to do this can be disastrous, especially if long-term care treatment is needed. And don't count on the government to pick up the bill for you, either. Make certain that your health coverage is adequate and that you have a plan to cover other elder care needs. This is the #1 error in financial planning for seniors as its estimated that half of the bankruptcy in the US is caused by health failures and the accompanying costs.
• Settling for low returns- don't let your fear of risking principal leave you with a guarantee of running out of money prematurely. Sensible asset allocation will substantially lower the risks of investing-including the chance that your money will not grow enough to meet your needs. But if you insist on keeping money in threemonth CDs and T-bills as many seniors do, your earnings will be so low that you increase the likelihood of running out of money. Sound financial planning for seniors means that your investment horizon should match your actuarial life expectancy.
• Not taking retirement distributions within the allowable time frame – avoiding costly withdrawal penalties whenever possible is just common sense. Do everything you can to avoid paying both the 10% early withdrawal penalty before age 59 ½ and the 50% excise tax for failure to begin taking mandatory minimum distributions by April 1 after attaining 70 ½.
• Failure to monitor or control your distribution rate – your financial advisor should be able to run some basic calculations based on the size and allocation of your portfolio that show a safe rate of withdrawal. A general rule of thumb is somewhere between 3 and 5 percent per year, depending on your portfolio's allocation between equity and fixed income investments. We have seen some financial planning disasters when people spend beyond this level
• Refusing to get a fresh perspective – no matter how effective your advisor or plan is, getting a second opinion on it will never hurt. Different advisors have different areas of expertise, such as taxes or mutual funds. Therefore, having a different set of eyes review your situation may provide insights that you would otherwise miss.
Sound financial planning for seniors results from avoiding major mistakes and sticking to the big picture guidelines as explained above.
Advisors that can assist seniors with retirement planning, check senior leads