1. Take control of your money
Many people don’t even read their monthly investment
statements. Upon retirement, some just leave their money in
the same plan that it has been in all along. Taking into account
your personal situation, you may want to consider your options, such as: keeping your assets where they are; withdrawing
your assets (taxes are generally due upon withdrawal and any
applicable tax penalties that may apply): or you may choose to
rollover your assets to an employer-sponsored retirement plan
that accepts rollovers, or to another eligible vehicle such as a
traditional IRA. Take control of your money when you make
the decision to retire from your company. By doing so, it gives
you the freedom to work toward maximizing your investments
by considering other options.
Pension Maximization Possibilities
Examine pension survivorship benefits. If you are one of
the lucky ones to retire with a pension, at the time of retirement, you must elect how you will disperse the benefit. To
protect your spouse, you typically can opt for a lower monthly
amount to ensure your spouse is covered until “end of plan.”
This might be the best option, but it might not. This is an irrevocable decision, so consult with a financial planner before
finalizing your election.
Did you know there is a return of premium term life insurance policy that may present an opportunity to enable you to
get all of your premiums back at the end of the term assuming
all terms and conditions are met?
The majority of pension benefits do not increase with age,
therefore consider what the money will be worth in 20 years.
Assuming above a 3% inflation rate, a $4,000 a month pension would only be worth about $2,000 a month in 20 years.
2. Not having a proper Retirement Income
Where do you draw your money from when you need it?
From an IRA? Sell stocks? 401Ks? Real estate? Brokerage accounts?
You have worked very hard for your money and decisions
on when and where to use your money can have ill-inten-tioned consequences.
Plan where your money will come from instead of putting
it all into one pot. In retirement, you should still have long
term, mid term and short term investments to help protect
you from market fluctuations while maximizing your income
potential. More conservative investments go in short term,
moderate investments for mid-term and more aggressive in
long-term. Picking and choosing investments to liquidate can
be stressful, and most advisers show you how and where to
save, but not how to create an income stream out of it.
Having an income spend-down plan can help minimize
taxes. For example, if you are taking all of your income
from your IRA, this could potentially put you in a higher tax
bracket. The goal is to find how much money to draw from
each of your investment assets to maximize your returns and
minimize your tax consequences.
3. Having an Antiquated Investment
Many pre-retirees/retirees have invested with a 60/40 stock/
bond ratio and think their portfolio is diversified. In the past,
bonds have yielded 5 to 7%, but now most estimates put projections for bond returns at an average of 2%. It is important to examine having some portion of your investments in
alternative assets or alternative strategies to work to minimize
volatility and potentially increase return. As few as two percent
of the U.S. population has a truly diversified portfolio with
alternatives. Diversification may allow you to hedge against
inflation and interest rates.
4. Underestimating Risks
There are three major types of risk that people fail to analyze: Market Risk, Longevity Risk and Inflation Risk.
A market risk (tied to sequence of returns) is the possibility that your investments could lose value because of movements in financial markets. A recession historically comes once
or twice every decade. Many 401Ks turned into 201Ks in 2008.
If you had retired during that time and were forced to sell
investments to fund your retirement expenses, then you would
have lost a great deal of the upside when the market recovered.
For example, Disney stock had dipped down to under $20 in
2008; you may not have been able to wait for it to recover and
then sell when the price was much higher.
People are living longer today and this forces us to evaluate
“longevity risks.” There is a 50% chance that a Baby Boomer
today will live to age 90. If you don’t plan accordingly, your
income could run out before you do. Most people think if
they draw 4% out per year, they will have enough income to
last. Some have argued that number should be about 2.5% to
3% per year. And, in the first three years of retirement, the
average retiree tends to spend more than they did before they
retired. This overdraw can also contribute to insufficient sums
for the later years.
Don’t forget inflation. At above a 3% inflation rate, the
value of a dollar in 20years is about half of what it is worth
today. A 2013 Bankrate survey concluded that some Americans
have become more risk averse and leave money sitting in cash.
If the bank gives you a yield at a rate under inflation, you are
actually earning a negative return during that time. Be aware
of how inflation affects your bottom line.
5. Lacking Protection for
Your Family and Estate
Often times, retirees might have a last will and testament,