5 Mistakes New Retirees Make (And How To Avoid Them)

Posted: January 19, 2021

Retirement is a new, exciting journey waiting to be conquered. To fully enjoy it, however, you need to create a carefully crafted plan. Start your golden years off on the right foot by avoiding these common mistakes we see new retirees make.

Taking Social Security too early

The amount of Social Security benefits available to you depends on when you were born, your earnings history, and your age when you enroll. You may claim Social Security as early as 62 or as late as 70.

If you choose to claim Social Security at 62, you will incur a 30% reduction in benefits over your lifetime. However, if you wait until full retirement age (67 for those born in 1960 or later), you will receive 100% of your benefit. Delaying benefits further opens up opportunities for larger monthly paychecks.

There are two advantages to delay your retirement:

If you delay claiming Social Security up to age 70, your monthly benefit throughout retirement can increase by 25%.
If you continue to work throughout this period, you can add to your earnings record and grow your benefits that way.

There are several factors in retirement planning such as health, life expectancy, current wealth, employment status, marital status, lifestyle expectations, and more. If you retire at age 62, for example, you may be better off withdrawing money from your retirement accounts and waiting until age 70 to start collecting Social Security benefits.

One of the biggest risks in retirement is longevity. The longer your life expectancy, the more you will benefit by delaying your Social Security benefits. Understanding your life expectancy will help you and your financial team structure your assets to make the most out of your retirement assets.

Stop taking on new investment opportunities

Just because you entered retirement, doesn’t mean you should stop looking for new investment opportunities or stop investing altogether. Your risk tolerance and capacity will likely change and you can reallocate your portfolio to reflect those changes.

At First Dakota, we utilize a three-bucket strategy that keeps assets needed in the short term — 1 to 3 years — invested very conservatively. The second bucket for mid-term — 3 to 7 years — is blended with growth and income holdings to replenish the short term bucket over time and guard against market volatility. Finally, the long-term bucket is invested more aggressively to hedge against inflation and address longevity risk.

Investing isn’t reckless. It’s carefully planned strategies that help bring your financial goals and dreams to fruition.

Putting your estate plan on the back burner

Any time you reach a major life event, such as retirement, it’s the perfect time to check-in with your estate plan. How long has it been since you’ve updated it? Have you experienced a life transition and need to update your beneficiaries? Are your assets properly titled? Do you want to start exploring charitable intentions? It may seem overwhelming now but it’s important to plan when times are good and you're able to ask questions and gain clarity in a calm space.

Now is also a good time to consider who you want to serve as your power of attorney to make financial and medical decisions for you if you are unable to act on your own behalf. These documents are critical to complete to avoid delays if you become incapacitated. While these conversations aren’t always easy to have, they’re important for your future.

Not accounting for your health

It's easy to forget about your health in early retirement because you're adjusting to a new way of life. Be sure that you consider the responsibilities that come with a change in health as the years progress. Are you looking into long-term care insurance? Do you see yourself moving into an independent living facility? Is your HSA invested? These are questions that need to be answered early on.

The cost of healthcare is astronomical. According to a Fidelity study, the average retired couple age 65 in 2020 will spend approximately $295,000 to cover health care expenses in retirement, excluding long-term care (which can cost roughly $90,106.08 per year in South Dakota). Are you prepared for that?

If you're still working and under age 65 your employer offers an HSA-eligible health plan, consider enrolling and contributing to a health savings account (HSA). An HSA has triple tax-efficiency for health care costs in retirement. You can save pre-tax dollars and possibly collect employer contributions, which have the potential to grow tax-deferred and be withdrawn tax-free if used for qualified medical expenses.

Don’t panic yet — your financial advisor can help evaluate your budget and make sure you have a plan in place to prepare for these expenses.

Neglecting your lifestyle

Creating a strong saving and investing plan is critical, but planning for your lifestyle is just as important. Do you know where you want to live or how will you spend your time? Without work 5 days a week, it can be easy to feel lost. It’s vital to find meaning and fulfillment in retirement whether that's through charity, hobbies, family, or part-time work.

Active retirees tend to be happier in the long-run whether that means traveling, various social events, or just being active like taking daily bike rides or walks in your neighborhood. Being active is not only good for your physical health, it also promotes strong mental health. Engage in activities that keep you moving, challenge you, engage your passions, and foster a sense of community.

Have a plan that promotes your goals

A solid financial plan will guide you in determining how much you can spend during your retirement years, while also establishing an investment plan to align with your interests. Having a plan provides guidance and allows you the peace of mind to truly enjoy your retirement.

First Dakota Wealth & Trust customers have access to our financial planning software that illustrates different retirement planning scenarios to give a clear picture of the future ahead. Take the path to a secure financial future and give our team a call today.

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.