11. Estate planning blunders.
Doug Oosterhart, owner, LifePoint Planning:
A wealthy older couple who are buy-and-hold investors and plan to give 50% of their estate to charity and 50% to family made two mistakes on the advice of their attorney: They dissolved a living trust in favor of a will, which can be contested in probate court, and they designated a charity as the beneficiary of a taxable account and family members as the beneficiaries of a traditional IRA and other pretax accounts. The beneficiaries should have been switched since the taxable account receives a stepped-up basis upon the deaths of the benefactors and taxes must be paid on the pretax accounts but not if a charity inherits them.
1. Lacking a realistic retirement budget.
Scott A. Bishop, Executive VP - Financial Planning, STA Wealth Management:
Not having a "true retirement budget … the exact monthly spending and annual spending (like property taxes at year-end) ... broken down into mandatory (like eating) and discretionary (like vacations) and debt to be financed (like car or mortgage loans)." Also not accounting "for the 'tax drag' of savings if most of the money is in pensions, 401(k)s and IRAs, which can take 20% to 40%+ of money away in each distribution."
2. Forgetting there is no free lunch when investing.
Jon Ulin, Founder and Managing Principal, Ulin & Co. Wealth Management:
"From MLPs, structured products, real estate, annuity or life insurance vehicles being pitched at steak dinners to high-flying mutual funds in a financial magazine, many retirees fail to correctly assess the risk they are assuming in return for yield. ...We remind investors to always consider the return 'of' their money as well as the return 'on' their money with every trade or purchase...There is no such thing as a free lunch."
3. Taking Social Security and pensions too early.
Dennis R. Nolte, VP, Seacoast Investment Services:
"We try to talk our clients out of taking Social Security too early or taking their pensions early unless there is a health reason to do so (or longevity concerns). Plus, many folks don't account for taxes having to be paid from qualified account distributions."
4. Oversimplifying expected market returns, downplaying risk of potential losses.
James Bayard, co-founder, South Wealth Management & LPL Financial Planner:
He recounted mistakes by two different clients: one a pre-retiree in his late 60s whose portfolio contained only stock funds, including emerging and frontier market funds; another whose balanced portfolio was heavily invested in floating-rate and high-yield assets. The stock-only investor thought that "stock returns are always higher than bond returns," not realizing the substantial market risk and sequence of return risk in withdrawals. The balanced portfolio client "focused only on interest rate risk in bonds and not on credit or liquidity risk." Both failed to understand the potential risk of large losses.Advertisement
5. Excluding income tax considerations from expected retirement paycheck.
Michelle Buonincontri, owner, New Direction Financial Strategies; author, "Being Mindful in Divorce":
"Not calculating income taxes due, as part of a retirement paycheck can really make a difference when determining what a retiree has available monthly and consequently can easily blow apart a financial plan. Active military service members receive a large portion of their income tax-free as Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAS), and I almost never see taxes as a consideration when they are figuring out their actual retirement income needs and benefits to support the life they are planning."
6. Failing to prepare emotionally for retirement.
Brandon W. Garrett, President & Chief Investment Officer, Snow Garrett Wealth Management:
"One of the biggest mistakes we often see retirees make is more of a qualitative planning issue. They work hard to save, create their financial plan, build an appropriate portfolio, design an income strategy but they fail to prepare themselves mentally for retirement….they often feel aimless, purposeless and unappreciated. And when things don't feel 'right' people are more apt to deviate from their plans or to act irrationally in volatile markets… This is why we work with clients for several months leading up to retirement, discussing things beyond just investments."
7. Believing dividend-paying stocks are safer than bonds.
Dan Moisand, principal and financial advisor, Moisand Fitzgerald Tamayo:
"The purported relative safety in some dividend payers pales in comparison to the safety inherent in good-quality bonds and CDs. Look at just about any dividend-paying fund or ETF and it's clear, the dividends were of little help if any during the crisis while good-quality bonds were a true safe haven. ... Many think dividends are a sign of corporate strength and in many cases, they are, but what is viewed as a strength can become a weakness. Just ask GE."
8. Being too conservative with investments, ignoring the effects of inflation.
Eric Walters, president, SilverCrest Wealth Planning:
"One of the most common mistakes that retirees are tempted to make is being too conservative with their investments in retirement without accounting for the risk of inflation on their lifestyle. These retirees focus on the volatility of equity investments when their investment timeline is actually quite long (with increases in longevity). The lower growth of a conservative portfolio may leave them vulnerable to inflation."
9. Contributing too much to tax-deferred, employer-provided retirement plans.
Sallie Mullins Thompson, CPA financial planner and tax strategist:
Those who do "are going to have a HUGE tax liability when RMDs start. This could result in more of their Social Security benefits being taxed. It could also cause them to be in a higher tax bracket. Who even knows what the tax rate will be when they retire? … There should be a balance between tax-free/exempt accounts and tax-deferred ones." Thompson suggests taking advantage of low tax rates now and making Roth conversions wherever possible to begin paying the taxes.Advertisement
10. Failing to prepare for the inevitable.
Chris Chen, fiduciary wealth strategist, Insight Financial Strategists:
"Perhaps the biggest mistake is to not get ready for the inevitable: illness, incapacity and death. That means not having a power of attorney, health care proxy, will, and a nicely organized folder where all the information is there for the folks who will help when a senior cannot help themselves anymore."11. Estate planning blunders.
Doug Oosterhart, owner, LifePoint Planning:
A wealthy older couple who are buy-and-hold investors and plan to give 50% of their estate to charity and 50% to family made two mistakes on the advice of their attorney: They dissolved a living trust in favor of a will, which can be contested in probate court, and they designated a charity as the beneficiary of a taxable account and family members as the beneficiaries of a traditional IRA and other pretax accounts. The beneficiaries should have been switched since the taxable account receives a stepped-up basis upon the deaths of the benefactors and taxes must be paid on the pretax accounts but not if a charity inherits them.1. Lacking a realistic retirement budget.
Scott A. Bishop, Executive VP - Financial Planning, STA Wealth Management:
Not having a "true retirement budget … the exact monthly spending and annual spending (like property taxes at year-end) ... broken down into mandatory (like eating) and discretionary (like vacations) and debt to be financed (like car or mortgage loans)." Also not accounting "for the 'tax drag' of savings if most of the money is in pensions, 401(k)s and IRAs, which can take 20% to 40%+ of money away in each distribution."2. Forgetting there is no free lunch when investing.
Jon Ulin, Founder and Managing Principal, Ulin & Co. Wealth Management:
"From MLPs, structured products, real estate, annuity or life insurance vehicles being pitched at steak dinners to high-flying mutual funds in a financial magazine, many retirees fail to correctly assess the risk they are assuming in return for yield. ...We remind investors to always consider the return 'of' their money as well as the return 'on' their money with every trade or purchase...There is no such thing as a free lunch."3. Taking Social Security and pensions too early.
Dennis R. Nolte, VP, Seacoast Investment Services:
"We try to talk our clients out of taking Social Security too early or taking their pensions early unless there is a health reason to do so (or longevity concerns). Plus, many folks don't account for taxes having to be paid from qualified account distributions."4. Oversimplifying expected market returns, downplaying risk of potential losses.
James Bayard, co-founder, South Wealth Management & LPL Financial Planner:
He recounted mistakes by two different clients: one a pre-retiree in his late 60s whose portfolio contained only stock funds, including emerging and frontier market funds; another whose balanced portfolio was heavily invested in floating-rate and high-yield assets. The stock-only investor thought that "stock returns are always higher than bond returns," not realizing the substantial market risk and sequence of return risk in withdrawals. The balanced portfolio client "focused only on interest rate risk in bonds and not on credit or liquidity risk." Both failed to understand the potential risk of large losses.Advertisement
5. Excluding income tax considerations from expected retirement paycheck.
Michelle Buonincontri, owner, New Direction Financial Strategies; author, "Being Mindful in Divorce":
"Not calculating income taxes due, as part of a retirement paycheck can really make a difference when determining what a retiree has available monthly and consequently can easily blow apart a financial plan. Active military service members receive a large portion of their income tax-free as Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAS), and I almost never see taxes as a consideration when they are figuring out their actual retirement income needs and benefits to support the life they are planning."6. Failing to prepare emotionally for retirement.
Brandon W. Garrett, President & Chief Investment Officer, Snow Garrett Wealth Management:
"One of the biggest mistakes we often see retirees make is more of a qualitative planning issue. They work hard to save, create their financial plan, build an appropriate portfolio, design an income strategy but they fail to prepare themselves mentally for retirement….they often feel aimless, purposeless and unappreciated. And when things don't feel 'right' people are more apt to deviate from their plans or to act irrationally in volatile markets… This is why we work with clients for several months leading up to retirement, discussing things beyond just investments."7. Believing dividend-paying stocks are safer than bonds.
Dan Moisand, principal and financial advisor, Moisand Fitzgerald Tamayo:
"The purported relative safety in some dividend payers pales in comparison to the safety inherent in good-quality bonds and CDs. Look at just about any dividend-paying fund or ETF and it's clear, the dividends were of little help if any during the crisis while good-quality bonds were a true safe haven. ... Many think dividends are a sign of corporate strength and in many cases, they are, but what is viewed as a strength can become a weakness. Just ask GE."8. Being too conservative with investments, ignoring the effects of inflation.
Eric Walters, president, SilverCrest Wealth Planning:
"One of the most common mistakes that retirees are tempted to make is being too conservative with their investments in retirement without accounting for the risk of inflation on their lifestyle. These retirees focus on the volatility of equity investments when their investment timeline is actually quite long (with increases in longevity). The lower growth of a conservative portfolio may leave them vulnerable to inflation."9. Contributing too much to tax-deferred, employer-provided retirement plans.
Sallie Mullins Thompson, CPA financial planner and tax strategist:
Those who do "are going to have a HUGE tax liability when RMDs start. This could result in more of their Social Security benefits being taxed. It could also cause them to be in a higher tax bracket. Who even knows what the tax rate will be when they retire? … There should be a balance between tax-free/exempt accounts and tax-deferred ones." Thompson suggests taking advantage of low tax rates now and making Roth conversions wherever possible to begin paying the taxes.Advertisement
10. Failing to prepare for the inevitable.
Chris Chen, fiduciary wealth strategist, Insight Financial Strategists:
"Perhaps the biggest mistake is to not get ready for the inevitable: illness, incapacity and death. That means not having a power of attorney, health care proxy, will, and a nicely organized folder where all the information is there for the folks who will help when a senior cannot help themselves anymore."11. Estate planning blunders.
Doug Oosterhart, owner, LifePoint Planning:
A wealthy older couple who are buy-and-hold investors and plan to give 50% of their estate to charity and 50% to family made two mistakes on the advice of their attorney: They dissolved a living trust in favor of a will, which can be contested in probate court, and they designated a charity as the beneficiary of a taxable account and family members as the beneficiaries of a traditional IRA and other pretax accounts. The beneficiaries should have been switched since the taxable account receives a stepped-up basis upon the deaths of the benefactors and taxes must be paid on the pretax accounts but not if a charity inherits them.Saving and investing for retirement is probably the single most important issue for the clients of financial advisors, and outliving their retirement funds is a primary worry. Despite these priorities, however, mistakes are made, often before a client even hires an advisor or afterward, when the client fails to follow through on the advisor's recommendation or outright opposes it. Given this background and the fact that, according to Cerulli Associates, half of advisors' clients are 60 or older while a quarter are between 50 and 59 — that is, in or near retirement — BenefitsPRO's sister site ThinkAdvisor wanted to hear from advisors about the biggest mistakes they've seen retirees make. The responses we received were wide-ranging and though primarily focused on financial matters also included emotional hazards. Many mistakes were mentioned by multiple advisors, and when that happened we included only one advisor's description of the problem to avoid repetition. Visit the slideshow gallery above to see what 10 financial professionals found to be retirees' biggest mistakes. READ MORE:
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Bernice Napach
Bernice Napach is a senior writer at ThinkAdvisor covering financial markets and asset managers, robo-advisors, college planning and retirement issues. She has worked at Yahoo Finance, Bloomberg TV, CNBC, Reuters, Investor's Business Daily and The Bond Buyer and has written articles for The New York Times, TheStreet.com, The Star-Ledger, The Record, Variety and Worth magazine. Bernice has a Bachelor of Science in Social Welfare from SUNY at Stony Brook.
