while making your retirement planYou may have encountered advice that seemed reasonable: pay off debt, avoid taxes, and stay safe with investments. Yet, according to financial advisors, some of these “responsible” steps may backfire and cost you tens or even thousands of dollars.
We spoke to Steve Sexton, CEO of Sexton Advisory Group; Matthew Bernard, CFP, assistant professor of financial planning at UIUC; Brian Nguyen, CFP, personal wealth advisor at Twin Peaks Wealth Advisory; and Eric Kroc, CFP, President of Kroc Capital, to get insight on the riskiest financial moves during retirement.
Here are 10 retirement strategies experts say you should avoid.
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1. Claiming Social Security as soon as you become eligible
If you apply for Social Security at age 62, your monthly benefits are permanently reduced by 30% compared to waiting until full retirement age. Although this is necessary if you have health concerns or need immediate income, you should consider that your lifetime checks may be unstable, especially if you live into your eighties or nineties.
Brian Nguyen advises “clients with longevity or strong health in their family” to delay benefits, as it can “significantly improve long-term retirement cash flow and increase survivor benefits for spouses.”
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2. Aggressively Paying Off Low-Interest Loans
Steve Sexton understands the emotional impact of debt, saying, “Emotionally, I completely understand it. People want peace of mind and the feeling of entering retirement debt-free. But I have seen retirees waste a large portion of their savings or investments just to end up with a mortgage with a 2-3% interest rate.”
The problem of eliminating low interest loans is becoming a cash crunch in the future. Inflation and investment returns may exceed the cost of the loan. “Sometimes, preserving cash and flexibility is the safer move,” Sexton concluded.
3. Selling the family home quickly
Downsizing is a great way to reduce expenses, but the housing market fluctuates, relocation expenses are not negligible, and many retirees underestimate the emotional adjustment of selling their family home.
Nguyen says this issue is common: “We’ve seen situations where retirees move away from family, friends, community or acquaintances in an effort to save money, only to later realize that the lifestyle compromise wasn’t worth it.”
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4. Transferring every investment into cash
Fear of market volatility may prompt many senior citizens to move their entire portfolios into cash and savings accounts. This move is risky because they still need growth-oriented investments if their retirement lasts 20 to 30 years.
Sexton says: “If your money stops growing altogether, inflation quietly erodes purchasing power year after year. There is a real risk in remaining conservative for too long.”
5. Investing money in the needs of adult children
It’s common to help adult children with housing, debts, or emergencies, but prioritizing your adult children’s finances should not be at the expense of your own safety. Unlike working-age adults, you have limited opportunities to rebuild your savings.
Eric Kroc offers a sobering example: “It feels good to give your child $50,000 to help with the down payment. However, it takes that money away from your portfolio for the next 30+ years. Second, it deprives you of about $107,000 in compound growth at a 6% annual return over 15 years. Do that three or four times, and you’ll end up with close to $600,000 in your future retirement wealth. Will spend.”
6. Delaying retirement distributions to avoid taxes
Deferring withdrawals from retirement accounts is one way to reduce taxes. However, delaying too much could lead to larger required minimum distributions later, pushing retirees into higher tax brackets and increasing Medicare-related costs.
Instead of dealing with this lack of money in your seventies or eighties, Sexton suggests “making strategic withdrawals earlier in retirement to really create a healthy long-term outcome.”
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7. Spending is too restrictive
Restrictive spending may seem like a smart move since you no longer have a guaranteed monthly salary. Yet, it often unnecessarily reduces the quality of life and prevents you from enjoying those golden years for which you spent decades saving.
Instead, spend sparingly. Sexton explains, “A good retirement plan should instill confidence in spending responsibly, not guilt every time you book a trip or take your grandchildren out to dinner.”
8. Become a buy and hold investor
Being a “buy and hold” investor feels “incredibly responsible,” says Matthew Bernard. However, senior citizens who never adjust their company equity portfolio expose themselves to unnecessary risk. An allocation that makes sense at 50 may not make sense at 70, especially when withdrawals begin.
“By holding stocks ‘to avoid taxes’ or ‘to be a long-term investor,’ (you) accidentally run the risk of massive concentration. I’ve seen professionals lose 30% to 40% of their net worth just before their target retirement date because their sector took a hit, and their portfolio was not diversified,” warns Barnard.
9. Having lots of cash in retirement
Having lots of cash in retirement sounds like a good thing, right? Not necessary. As Kroc points out, this is a recipe for losing money.
If you hold $300,000 or more in cash and it earns you 4% while inflation runs 3%, you are getting a positive return but losing about $3,000 per year in purchasing power. At 25 years of retirement, that $300,000 in cash is worth about $143,000. If you take into account the opportunity cost of (it) not being invested in a balanced 60/40 portfolio earning 7%, we’re talking about a $400,000 to $600,000 loss!”
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10. Transferring Required Minimum Distributions to a Taxable Investment Account
You may believe that reinvesting required minimum distributions in a taxable account is the best move if you don’t need the money immediately.
While this allows the fund to grow, Kroc warns against this “zero-sum game that taxes your retirement.” Interest, dividends and capital gains generated inside a taxable account can create ongoing annual tax bills that would not apply inside a tax-advantaged retirement account. Instead, Kroc advises retirees to “start a Roth IRA conversion at age 60 to 65 to save $150,000 to $300,000 in taxes over your lifetime.”
ground level
Retirement decisions are rarely simple. In many cases, conservative or “responsible” advice can lead to unintended financial consequences later on. Financial advisors say it’s important to understand how taxes, longevity, inflation and income planning work together before making key retirement choices.
To avoid wasting money Before making any big moves, run the numbers through long-term retirement income planning instead of just focusing on short-term savings or emotional comfort. What seems smart today may be expensive in the next 20 years.
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