By Ted Stricker, CFP®
Retirement is such an important life event that affects nearly every aspect of your financial life. From spending, investment management, and changes to lifestyle, to taxes, Social Security, and estate planning, the range of considerations may seem endless (and potentially overwhelming!).
In our many years of counseling clients and observing problem areas in their initial retirement plans, we come across many common mistakes people make, both in the prior planning stages and afterward. Here are five crucial missteps we often see and help our clients avoid.
1. Underestimating Healthcare Costs
Understandably, healthcare is one area of retirement planning that should not be overlooked, since healthcare costs tend to rise as we age. Healthcare could be the largest expense you face in retirement; it not only includes Medicare premiums, but other costs as well, such as co-payments, supplemental insurance premiums, expenses not covered by insurance, and, of course, custodial care expenses.
In a recent study by the Employee Benefit Research Institute (EBRI), even those retired couples at age 65 with supplemental insurance coverage may need between $234,000 – $351,000 to have an above-average chance of meeting all their healthcare expenses in retirement.
In our planning analysis with clients, we factor such costs into the overall retirement plan to account for annual expenditures, taking advantage of any tax strategies available. We encourage eligible clients to open tax-advantaged health savings accounts (discussed here) to grow for future medical expenses. We also discuss whether long-term care insurance would be a viable option and the costs/benefits of this particular risk management insurance.
2. Not Having a Coordinated and Tax-Efficient Withdrawal Strategy
Most retirees will need to withdraw from retirement savings at one point or another to help finance their post-working lifestyle, whether by needing supplemental income along with Social Security or due to required minimum distributions (RMDs) from tax-deferred IRAs or employer-sponsored retirement accounts. Many have several types of retirement accounts, taxable or not, but no plan as to the best and most tax-efficient method of drawing on these accounts for retirement income.
Without a plan, retirees could end up paying more in taxes than they need to, and through inefficient withdrawals, may end up reducing the longevity of their savings over time. Instead, with effective planning that coordinates income needs with tax planning, investment management and even estate planning, we help clients make the best use of their retirement resources.
3. Ignoring Inflation
Inflation considerations and adjustments over time are crucial elements of a well-designed retirement plan. Whether a lot or a little each year, prices do rise and will likely do so significantly in a retirement lifetime. Inflation involves the loss of purchasing power. In other words, over time, it will cost you many more dollars to buy the goods and services you require to maintain a certain lifestyle and pay your bills.
Even a low inflation figure could be significant: At just 3% annually, spending $100 today might require spending $181 for the same purchase in 20 years. If you ignore inflation in retirement, over time you may find yourself with higher unplanned spending just to maintain the same lifestyle and potentially not having enough resources to draw upon late in life. In all our planning with clients, we take the time to build reasonable inflation assumptions into our analysis to account for the effect of rising prices on your wealth.
4. Relying Too Heavily on Social Security
Even though Social Security is woven into nearly everyone’s retirement planning, its benefits were never intended to be the sole source of income for retirees. In fact, recent statistics indicate that, for a retiree at age 65, Social Security benefits might only replace about 39 percent of past earnings. Further, studies indicate that the average Social Security benefit is only $1,862/month, or $22,344 per year—hardly enough to cover today’s living costs for most people.
Knowing this and projecting what may be required to sustain your lifestyle in your later years is the heart and soul of our retirement planning work. Along with strategizing how to maximize your benefits, given enough time and preparation, we can advise you on the most effective way to save and grow your wealth to provide enough resources to supplement your Social Security income and allow you to pursue your long-term objectives and desired lifestyle with confidence.
5. Overlooking Estate Planning
While no one likes to envision or think about their own eventual passing, proper effective estate planning is a “must” for everyone—even those whose estates may be modest. Estate planning is not just about having a Last Will. At its core, it’s about fulfilling your wishes and legacy toward and at the end of life that reflect your values and what you care most deeply about.
Unfortunately, many either wait too long to get their estate and documents in order or fail to review their estate plan periodically to confirm it still fulfills their current wishes and intentions. In addition, a Last Will and other basic estate documents may not address tax issues or special legacy intentions in an efficient manner.
In our services as business, tax, and financial advisors, we know all too well the pitfalls that can occur with improper estate planning. This is why we carefully consider estate and legacy objectives in our overall financial plans for clients, including thorough regular reviews and as tax and other laws change.
If You Have Questions, Speak With Us
Retirement planning is a core service we offer at Bernath + Rosenberg, and we’re here to help!
Our experienced team of Certified Public Accountants and CERTIFIED FINANCIAL PLANNER® professionals stays current with the latest in tax laws and planning strategies to help you pursue a rewarding and comfortable retirement, according to your unique and special objectives. By coordinating your retirement planning and long-term goals, we can assist you in avoiding the five mistakes discussed here (and more!) to benefit your financial future.
To get started and make the most of your hard work, schedule a meeting by calling (212) 221-1140 or email tstricker@brwealth.com.
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 26 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining innovative approaches and solutions that reflect clients’ personality, lifestyle, and goals.
For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER® practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.
