Morgan Stanley
  • Wealth Management
  • Feb 7, 2023

5 Mistakes to Avoid in Retirement

How you plan your finances in retirement may be just as important as the process of saving for retirement. Here are some key considerations.

You’ve spent a lifetime planning for your retirement goals, contributing to your 401(k) and perhaps investing additional assets in an individual retirement account (IRA) and other accounts. Now, you’re finally on the verge of retiring. However, you may be surprised to find that retirement planning doesn’t stop once you retire.

To keep all your life and retirement goals on track, here are several pitfalls to avoid, as you embark on this new, exciting chapter in your life.

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1. You Apply for Social Security Benefits Too Early

You can apply for benefits at age 62, but the benefit you receive will be up to 30% less than it would be if you waited until what the Social Security Administration deems “full retirement age” (FRA).

Electing to receive benefits before your FRA can reduce your benefits if you decide to keep working. For every $2 you earn above a specific threshold, which is $21,240 in 2023,1 you lose $1 in benefits. Unless you really need the money, consider waiting to apply. And if you can afford it, put off applying until age 70 when your benefit will be about 32% higher than it would be at FRA.2

2. You Fail to Take a More Conservative Investment Approach

When you were younger, you could invest more aggressively because you had time to recoup any losses you might have incurred. As you approach retirement, however, the game changes. You’re going to need the assets you’ve accumulated for day-to-day expenses and no longer have the luxury of time that you once enjoyed.

Especially during the early years of retirement, when you’re beginning to withdraw assets from your retirement nest egg, it’s important to employ a strategy that considers capital preservation. Without this consideration, the combination of spending and volatile markets might deal your portfolio a blow from which it may not be able to recover.

It’s important to understand the options available to help protect the assets you’ve spent a lifetime accumulating.

3. You Spend the Way You Used To Spend

Hand in hand with a more conservative investment approach is a more conservative budget. You don’t necessarily have to compromise the retirement lifestyle you envisioned for yourself, but you do have to maintain a realistic view of your finances.

Since you’re no longer earning a steady paycheck—or you’re working less—your income may not be as high as it once was. A lifetime’s worth of retirement savings can look like an enormous source of assets that you can tap into whenever you like, but your retirement may last 30 years or more. It’s a good idea to work with your Financial Advisor to take inventory of expenses, identify all sources of income and develop a strategy to maintain your retirement lifestyle for as long as you live.

4. You Miscalculate Your Required Minimum Distributions

Generally, once you reach a certain age, you must take annual distributions—known as required minimum distributions (RMDs)—from your 401(k), Traditional IRA, Simplified Employee Pension (SEP) and SIMPLE IRAs or other qualified retirement plans, whether you need them or not (Roth IRAs and Roth 401(k)s are exempt from this requirement).3  The SECURE 2.0 Act of 2022 (“SECURE 2.0”), which was signed into law on December 29, 2022, increases the age at which required minimum distributions (“RMDs”) must commence from age 72 to age 73 in 2023 and to age 75 in 2033 (“RMD Age”).* However, you may have some flexibility as to when you actually have to take the first-year distribution. The account holder can take it during the year they reach their RMD age, or can delay it until April 1st of the following year, known as the required beginning date. This means that if you opt to delay your first distribution until April 1st of the following year, you will have to take two distributions during that year—the first year's and your second year’s required distribution.

RMDs are generally taxable at your individual tax rate and, if you fail to take them, you are generally subject to a penalty tax. RMDs are based on IRS life expectancy tables; while you can access these tables online and do the math on your own, we suggest you seek guidance from your accountant or tax advisor.

On a side note, if you participate in an employer-sponsored qualified retirement plan (other than an IRA-based plan) and are still working for the plan sponsor, you don’t have to start taking distributions from that account at your RMD age, unless you own more than 5% of the plan sponsor, or the terms of the plan require all employees to start taking RMDs once they reach RMD age.

5. Not Taking Health Care Expenses into Account

A 2021 survey by Nationwide Retirement Institute found a little more than half of retirees are very or somewhat concerned about not having enough money to cover unplanned medical expenses in retirement, two-thirds are concerned about health-care costs becoming too burdensome, and 50% are only somewhat, or not at all, confident in their plan to pay for health-care costs beyond what Medicare covers.4

These results aren’t unexpected, given health-care cost trends. Consider this: The average couple will need $315,000 in today’s dollars for medical expenses in retirement, excluding long-term care.5

What’s more, it’s estimated that today’s 65-year-old have a 70% chance of needing extended care at some point in their lives. And 1-in-5 65-year-olds will need long-term care for more than five years.6 Because of statistics like these, recognizing the potential need for long-term care is another important issue to consider in terms of asset erosion.

One option for retirees is a long-term-care insurance policy to help pay for the costs associated with long term care services. It may also provide more options for your care and relieve loved ones from full-time caregiver responsibilities.

Start the Conversation

How you plan your finances in retirement is just as important as your journey to save for retirement. It’s crucial to understand the available options to help protect the assets you’ve spent a lifetime accumulating. Talk with a Financial Advisor today and start the conversation on ways to plan for an optimal retirement.

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