The average 65-year-old man retiring this year can expect to have another 17 years of living in front of him, according to the National Institute on Aging. For a woman, that number jumps to 20 years.
That’s a lot of time to travel the world, enjoy hobbies and make memories with family and friends. On the other hand, it can also be a lot of time to stress about rising expenses and dwindling assets.
Fortunately, if you plan correctly, you can minimize the chances of ending up with too many years left and too little money in the bank. However, if you think you’ve made mistakes (or are making mistakes) when it comes to retirement planning, rest assured there is always time to make a correction.
Here are five common retirement planning mistakes and how to do damage control for each one.
Retirement Planning Mistake: Focusing solely on your rate of return.
The Solution: Create a diversified portfolio.
It makes sense that investors want to maximize their returns, but financial advisors say it’s a mistake to take a narrow view of retirement portfolios.
“People tend to chase rates of returns,” says Bob Gavlak, a certified financial planner and wealth advisor with Strategic Wealth Partners in Columbus, Ohio. “[Rates] are not in your control. You need to look at your overall strategy.”
Rather than trying to put all your money in specific funds that did well in previous years, it’s better to spread investments over a variety of fund types – such as index, balanced, equity and global – that offer a combined level of risk appropriate for your age and goals. This approach diversifies a retirement fund so the entire portfolio won’t be in jeopardy should one industry or sector run into economic trouble.
Retirement Planning Mistake: Forgetting about taxes.
The Solution: Have a tax plan for investments and assets.
Thomas O’Connell, president of International Financial Authority Group in Parsippany, New Jersey, says taxes are another area that trip up retirement planning.
“People don’t typically have the same deductions [in retirement], so their effective tax rate is going to be higher,” O’Connell says. “They are ending up paying more in taxes even though their lifestyle hasn’t changed.”
Minimizing taxes in retirement can be achieved through a combination of strategies, Gavlak says. Investing in Roth accounts is one way to ensure withdrawals are tax free. Meanwhile, distributions from taxable retirement accounts can be timed to coincide with low-income, and therefore low-tax, periods. Owning a home, rather than renting, is another way to potentially lower taxes in retirement.