by Marc Bastow (of Main Street Investor)
Think you’re well-prepped for retirement? Don’t sabotage your savings—here are a handful of common retirement wreckers to watch out for.
Retirement Mistake #1: Taking Social Security Earlier than Necessary
Make no mistake: The Social Security puzzle is more complex than simply saying “Hey, I turned 62; where’s my money?”
Sure, you’re allowed to start collecting your monthly social security check that early, but unless you have a truly compelling reason to do so, it’s a grave mistake.
The money you receive at 62 is less than what you will get at what the Social Security Administration (SSA) calls “full retirement age”.
Calculating your full retirement age is a function of what year you were born (see this SSA chart), and it’s a sliding scale. For example, the SSA defines 67 years old as the age to receive full SSA benefits for those born in 1960 and later.
The SSA reduces benefits based on the number of months you start getting benefits before that magical full retirement age—and it’s quite punitive.
For example, for those born in 1955, the full retirement age is 66 and two months. They would see a reduction in benefits of 25.8% if they start taking them at 62. Even at 65, that deduction represents about a 7.8% reduction from full benefits.
Keep in mind that your annual cost-of-living adjustment (COLA) is based on your initial benefit payment, so taking it early reduces that benefit, too. Even worse, you stand to lose even more if you plan on claiming benefits on your spouse’s work record.
Bottom line: If you can afford to do so, wait until full retirement age. Waiting beyond that point is literally a bonus, as monthly benefits rise over 30% by age 70.
Retirement Mistake #2: Not Taking Your Annual Minimum Required Distributions
Put this action on your calendar every single year: required minimum distributions. It’s an event you don’t want to miss.
Unless you can qualify based on a number of exemption criteria, if you own an IRA, 401(k), 403(b) or IRA-based plan like a SEP, you must take your first distribution from that account starting April 1 the year after you turn 70 ½, based on this table.
If you don’t take the distribution, the IRS will hit you with a 50% penalty on the amount you should’ve taken out. Fortunately, you’re responsible for determining exactly how much that is in nominal value, so there should be little guesswork involved in how much to take out.
Missed the date? Don’t panic. The penalty may be waived if you can establish that a shortfall or missed payout was due to reasonable error and you are trying to remedy the mistake. Naturally, there’s a form to file, but you don’t really want to get into that mess.
Take the money. Go on vacation, reinvest it, stuff it in a safe box—just don’t forget to take the action.
Retirement Mistake #3: Falling for Scams and Promises
Fact: everyone is susceptible to fraud. It doesn’t matter how smart you are, how much money you have, nor your level of education… just ask Bernie Madoff’s hundreds of victims.
While most of us probably don’t have the kind of high-level contacts to get caught in Madoff’s type of high dollar-value play, caution should rule your thinking when you get calls, emails, newsletter solicitations or the “Psst… have I got a tip for you” nudge from a dinner party guest.
I’ve written about this before, but it’s always worth repeating: Don’t invest in anything you can’t understand. If you can’t quickly figure out what you’re investing in, what it costs, what the realistic returns may be, and—most importantly—the risk to your capital, forget it!
If you hear that a particular product can pay you out with triple-digit return winners every week, be skeptical. Financial windfalls that rely on your investment in a technology that “nobody else knows about” are fools gold.
Newsletters and e-letters can be great sources of information and advice. Find one that is right for you and your investment profile, but avoid getting caught up in any attempts to sign you up for services, products or additional publications that you don’t need or want.
Retirement Mistake #4: Following Plans That Don’t Work for You
Annuities are a powerful draw for those seeking steady income heading into and throughout retirement; they are a HUGE business.
The Insured Retirement Institute (IRI) recently reported full-year 2014 sales of $229 billion industry-wide, based on data from Beacon Research and Morningstar, Inc.
Learning the differences among the seemingly limitless types of annuity products can not only save you money, but help you avoid purchasing a product you absolutely don’t need.
Annuities generally fall into two categories: deferred and immediate. Next, they are sliced and diced into two other categories: fixed and variable. While digesting a basic primer here, keep this critical point in mind: Nothing is guaranteed, no matter what a broker, friend or salesperson says.
The basic annuity product is backed up by some kind of financial institution; if they go broke, your payout is in jeopardy. Make sure you find not only an annuity product that is right for you, but one that is backed by a highly rated insurance company for some additional peace of mind.
Reverse mortgages are cut from a similar cloth… and regardless of what Robert Wagner tells you, they can be complicated.
The simple explanation of a reverse mortgage is it allows you to tap into the equity in your home by turning it into cash through monthly distributions or a series of advances. The good news: you get to stay in your home.
What many people fail to realize is that these transactions are loans and they must be paid back at some point. If you’re not paying it back, then it could become your heirs’ responsibility. This is likely the last thing they want to do when you’re gone, particularly if your home has lost market value.
When used in the appropriate circumstance, reverse mortgages can serve as a nice source of additional income. Just be sure to consult an advisor, including the Federal Trade Commission, which provides this detailed primer on reverse mortgages. Don’t simply jump in with both feet.
Retirement Mistake #5: Giving Up On Your Skills
If you have a hobby or life’s passion, pursue it. In fact, try to fit it into the next phase of your working life.
Consulting, freelance, hourly or contract work can enhance your life in unimaginable ways, particularly your mental and financial wellness. Don’t give up on any of these options just because you’ve decided to retire.
Volunteerism is another way to extend the knowledge you’ve accumulated toward helping others—sometimes in more rewarding ways than you initially believe.
Naturally, there are IRS rules about minimum amounts of money you can make before your Social Security payments are taxed. The IRS uses a combined income calculation—the total of your adjusted gross income, nontaxable interest and half of your Social Security benefit—to figure it all out.
If that number exceeds a certain limit (in 2014, it was $32,000 for a married couple filing jointly, and $25,000 for single filers), you will get hit with a sliding-scale of taxes that can be as much as 85% of your benefit.
Daunting? Sure. Annoying? Absolutely. But don’t let this stuff deter you from following that passion or desire to keep on working. Mental health is often the most important element of a happy, healthy retirement.
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