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#1 Not having a rational process

Having a rational process for decision-making helps maintain focus, reduces uncertainty, and ensures that everyone remains on the same page. Having a process translates to efficiency and usually results in more money spent AND less frustration. Having a process should allow individuals to internalize planning subjectivity and view the totality of the financial planning landscape before deciding what, or if, to implement anything.

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Once all areas of the planning landscape become more apparent, the entirety of the financial planning landscape becomes clear. At this moment, a genuinely rational decision can be made and executed with total confidence.

#2 Failure to coordinate social security

Every plan will likely have several social security scenarios to consider and often using a detailed cash flow model. Variables include income needs, tax considerations, and other income. Delaying the start of social security payments as late as 70 for a higher payout may ultimately result in increased lifetime benefits. While a delay for a higher payout is subjective, there should be no debate that maximizing potential spousal benefits can significantly increase benefits for non-working spouses or spouses with a reduced earnings history.

#3 Missed Medicare deadlines

Medicare will require individuals to sign up within three months of formal retirement when approaching retirement. While individuals covered under a working spouse’s primary health plan will likely remain on their spouse’s plan, others failing to sign up for Medicare at age 65 may end up paying penalties that last for life.
Additionally, not being continuously covered, forgetting to file for part D coverage, or not watching for Adjusted Gross Income to determine part B & D premiums could result in higher premiums or unnecessary extra costs.

#4 Missing out on employee benefits

Employer benefit plans pool large numbers of participants to make specific benefits much more affordable. Short and long-term disability, AD&D coverage, access to Health Savings Accounts (HSAs), group long-term care insurance coverage, term insurance, and even estate planning services may be available through an employer at a fraction of the cost.
In some cases, this will be the last chance to get decent coverage even though it may expire once you retire. We say if it’s free and requires no medical exam, just sign up for it.

#5 Not coordinating a retirement date

The timing of one’s actual retirement date can present a potential opportunity for reduced taxable income in the final work year. Retiring in January instead of December may result in vacation pay, bonuses, and other departing last-minute taxable income being taxed in a different possibly lower tax year. This is as opposed to the compensation paid in December (and added to a full year’s worth of income).

Recommendation: Touching The Retirement Accounts. Do’s & Don’ts

#6 Failing to utilize a low tax rate

Just into retirement, many retirees find themselves in the lowest tax bracket of their recent lives. It happens because earned income has been reduced, sometimes down to zero.
Furthermore, social security and even a pension can sometimes be deferred, opening up a short window to “fill in” taxable income utilizing a low tax rate. A once-in-a-lifetime opportunity to affect Roth conversions in a low tax year may present itself. It could also be a great time to diversify employer stock options and reduce any compressed business risk from working years. The window of opportunity is sometimes very short as deferred income sources such as social security, pensions, and required minimum distributions start to “kick in.”
[VALLEY of TAX]

#7 Not fully funding work retirement plan(s)

Employer-sponsored retirement plans offer individuals the option to make pre-tax contributions (i.e., Traditional 401(k)) to reduce taxable income while working. The mathematical benefit of long-term compounding interest deferred to a lower tax rate environment, such as the early years of retirement, may make a strong case for lowering taxes today and paying them tomorrow.
Certain employers may additionally offer employees auxiliary tax deferral plans that allow substantial contributions beyond just a 401(k) plan’s annual maximum. Some employers also allow access to a 457 or 403(b) plan, permitting employees to defer even more money, further lowering their taxable income. And if over age 50, individuals can contribute an additional amount to one of the plans using the “catch up” provision. Of course, certain restrictions may apply.

#8 Having no brokerage account

Failing to incorporate tax flexibility in planning by not funding different types of accounts is a common retirement regret. Most are familiar with the tax-free nature of Roths or the tax deferral nature of a 401(k), but too many retirees fail to fund just a basic post-tax brokerage account.
Technically, post-tax brokerage accounts are not “retirement accounts.” These savings vehicles are home to many of the most desirable retirement income-generating investments. Examples include municipal bonds, dividend stock, and even acting as a cash “storage tank” for future rental real estate or business opportunities.
The decision of what type of account to fund usually revolves around when the money is needed or wanted and what tax breaks are available today versus tomorrow. Also, it’s always important to consider personal preferences regarding cash flow and liquidity requirements.

  • Tax-exempt accounts are funded with post-tax money, and withdrawals are typically tax-free. Examples: Roth IRA, Roth 401(k), Roth 403(b), 529 plans
  • Tax-deferred accounts are funded with pre-tax money, and withdrawals are taxed at ordinary income tax rates when withdrawn. Examples: Traditional 401(k), Traditional 403(b), Traditional IRA, SEP-IRA, SIMPLE plans, Deferred annuities
  • Post-tax accounts are funded with after-tax money and placed in a taxable brokerage account. Either short or long-term capital gains apply. Examples: Employee stock options, a personal post-tax stock portfolio, or certain government and municipal bonds

#9 Untimely sale of appreciated assets

Investments such as Real Estate or post-tax brokerage assets could have unintended tax consequences if sold haphazardly. Holding post-tax investments for at least 12 full months will generally result in tax levied at the more favorable long-term capital gains rate. But unfortunately, many retirees are unaware that even the long-term capital gains rate is a tiered tax system. Depending on taxable income, assets are taxed at the 0%, 15%, or 20% long-term capital gains rate. It may make sense to try to sell highly appreciated assets over several years instead of all at once to capture the lower 0% or 15% long-term capital gains rate avoiding the top 20% rate (if possible).

#10 Giving up a guarantee

Taking a pension versus rolling over a lump sum is always a personal decision. Market appreciation versus guaranteed income are two opposing forces, each with a vital role in the financial plan. However, features such as a Cost of Living Adjustment (COLA) linked to many pensions can increase the payout received by two or even three times throughout retirement. Retirees should strongly consider what they are giving up when rolling out of any pension plan, calculate a cost-benefit, and understand if the choice is permanent.

#11 Ignoring asset allocation

Proper asset allocation is a commonly overlooked yet highly consequential retirement planning responsibility. It’s the individual’s responsibility to apply diversification techniques across all accounts and ideally use a cohesive “global” risk tolerance policy. It’s generally known that diversification among accounts leads to more favorable returns long-term for the passive investor. The purpose is to reduce overall market risk. Selecting a globally considered asset allocation may “fill” any potential allocation “holes” that might exist if there happens to be lackluster retirement plan options available. The idea is that the investor is actively trying to avoid the risk of heavy losses in specific market sectors by spreading the risk around, but still basing selections on a globally identified risk tolerance.

#12 Not re-thinking risk tolerance

As one approaches retirement, the risk taken with market accounts may need a review. That’s because when retirement starts, income generally begins. The strategy used to now create income from investment portfolios will be very different from the strategy used to build the portfolio. So it’s prudent to re-think risk tolerance and possibly an overhaul of accounts.

#13 Forgetting to rebalance

Remembering to rebalance investment portfolios quarterly should be habitual. It is the process of pairing back winning positions and potentially replenishing losing positions to arrive back at the original selected asset allocation. Allowing accounts to go off course diminishes diversification efforts and, if left unchecked, can lead to higher degrees of concentrated sector and market risk.

#14 Having no distribution strategy

Distributions from retirement accounts are often the most elusive part of the retirement planning process. That’s because it’s often the last piece of the mosaic and is based entirely on other components of the financial planning landscape.
The best way to raise consistent income to meet essential and discretionary needs can be subjectively rooted in mathematical, philosophical, and personal preferences. It’s not uncommon that individuals with similar financial profiles have very different beliefs on a suitable distribution strategy.

#15 Leaving behind a mess

When we pass, most of us prefer to be remembered in a positive light by friends and loved ones – and not for leaving a huge mess behind. Unfortunately, not having a proper estate plan will likely result in the estate going through probate, adding cost, publicly exposing sensitive estate details, and delays of the ultimate disposition of the estate.
Furthermore, not having the correct beneficiaries listed on direct transfer assets such as IRAs and 401(k)s can cause infighting between family, accidental disinheritance, and unfulfilled final wishes.

Editor’s note: This blog offers informal investment and financial planning advice. We know nothing about your unique financial situation. The buying and selling of any financial product or security should only be considered in context. If appropriate, seek the counsel of experienced, ideally objective, financial, tax, or estate planning professionals. Past performance is not indicative of future performance.

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