Retirement isn’t what it used to be. Most of us will want to stay active — with travel, family, volunteer activities and hobbies — long after we leave our full-time jobs. In addition, we’ll most likely be living longer than retirees of the past.
According to U.S. government figures, if you’re an average American, you can expect to live into your 80s. What’s more, 25% of today’s 65-year-olds will live past the age of 90, and 1 out of 10 will live past 95.1
All of this means you’ll want to be prepared for a long, secure retirement. How can you achieve that? It starts with careful planning and avoiding some of the financial missteps people tend to make along the way.
Here are five of those common mistakes — and strategies to help you avoid them.
Higher investment risk during a down market is just one of many concerns that may surface when portfolios aren’t diversified. The key idea behind diversification is that the positive performance of some investments can help serve as a buffer or outweigh the negative performance of others. This is especially important as you near retirement, when you may have fewer years to rebuild from potential losses.
When looking at diversification, it’s important to review all investments and financial accounts across your portfolio, regardless of where they are held. Your financial advisor can help you to diversify based on your risk tolerance as well as your investing timeline. If one investment has a rocky quarter or year, a diversified portfolio can help ensure your overall retirement goals remain on track.
Death can be difficult to discuss. But not talking about it — and not planning for it — could place a financial burden on your loved ones.
For many people, the idea of estate planning simply means writing a will, but this is just one element of the process. Additional recommended steps include:
- Document your health care directive and power of attorney designation to help ensure your wishes are followed.
- Ensure beneficiary designations are up-to-date for all financial accounts including retirement, annuities and insurance.
- Keep a list of online accounts and passwords in a secure place, and ensure your attorney or beneficiaries can access it quickly if needed.
Watch this short video for more estate planning tips.
Enjoyment of your retirement years can tarnish quickly if health issues arise, which is why it’s important to plan for both expected and unexpected medical expenses. Not having enough health care coverage or a long-term care strategy can derail your financial plans.
For health care, begin by researching the options so you understand which Medicare benefits you’ll be eligible for down the road (a good resource is Medicare.gov). Note that Medicare isn’t a substitute for long-term care coverage. For long-term care, consider purchasing insurance in your 50s — typically, the younger and healthier you are, the lower the cost.
It’s not uncommon for people to change jobs several times in their career, resulting in what are called “401(k) orphans.” Consider consolidating some of your assets for greater investment control or improved management with factors such as risk and tax diversification.
Leaving 401(k) plan assets in your existing company-owned plan may give you access to institutional funds that charge less in fees than funds outside an employer plan, but there are many other factors to consider as well. Investment options and control, distribution flexibility and creditor protection are just a few of the things you should keep in mind. Depending on your situation, it may make sense to consider consolidating your retirement assets in one place.
One option is to roll your 401(k) into a traditional IRA, which may provide you with more investment choices and control over future distributions. With a 401(k), your employer determines the rules for participants, and they may limit distributions to a single lump sum or a certain number per year. With an IRA, you decide the timing of distributions. This flexibility can be a big plus when it comes to your retirement income strategy.
If you don’t have a well-planned tax strategy, you could end up paying more to the IRS than needed. With recent changes to the tax code, many individuals moved into a different tax bracket and those who itemize deductions may need to rethink their tax strategies.
A key first step is to understand the tax categories involved in retirement planning. With a clearer picture of how these work, you’ll be armed with the foundational information for a conversation with your advisor and tax professional about tax allocation among investments.