Americans make plenty of mistakes when it comes to planning for retirement, the biggest of which is not saving enough. In fact, a recent GOBankingRates survey found more than half of Americans will retire broke. Even if you have made saving a priority, however, you still can make missteps once you leave the 9-to-5 that will put a comfortable retirement at risk.
1. Claiming Social Security Too Early
More than a third of baby boomers take advantage of the option to claim Social Security benefits early at age 62, according to the Center for Retirement Research. But taking benefits before full retirement age results in a permanent reduction of as much as 25 percent of your benefit, said Patricia Cathey, an investment advisor with financial services firm Smart Retirement in Denver.
Full retirement age is 66 for those born between 1943 and 1954 and gradually increases until it reaches 67 for people born after 1959. “Waiting to claim Social Security is one of the best things you can do to boost your income in retirement,” Cathey said. “And there’s a big bonus for delaying your claim beyond your full retirement age: Your benefit will grow by as much as 8 percent a year from your full retirement age up until age 70.”
2. Continuing to Work After Claiming Social Security Early
If you start receiving benefits at 62 and continue to work, you will lose $1 in benefits for every $2 earned above the annual limit of $17,040. The year in which you reach full retirement age, you will lose $1 in benefits for every $3 earned above the annual limit of $45,360. That continues until the month you actually reach full retirement age — at which point the limit disappears.
3. Carrying Debt Into Retirement
Having debt in retirement when you are on a fixed income makes you vulnerable to financial hardships because it leaves you with less money to cover unexpected expenses, Cathey said.
She recommends you pay off all debt before you retire. But if that’s not possible, have a plan to pay it off by a certain date in retirement.
In particular, you should focus on paying off your mortgage, because it is the biggest monthly expense for most people, said Robert Steen, enterprise advice director for retirement and complex financial planning for USAA, which offers financial services for members of the military.
4. Being Too Conservative With Investments
Many retirees shy away from holding stocks in their retirement account portfolios because they fear losing money in a market downturn. By avoiding stocks, though, they are trading off one risk for another — not having enough growth potential in their portfolio to outpace inflation, Steen said.
Although they are often volatile over short periods, stocks tend to outperform bonds and other conservative investments over long periods, said David Walters, a certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Portland, Ore., office.
“Retirees need to understand that the period of their retirement can be upwards of 30 years, and they need their portfolio to support them throughout this entire period,” he said. “So, while it is important to keep the risk of the portfolio in check, some allocation to stocks is warranted.”