Retirement Guys: Avoid retirement mistakesWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
Often a retiree’s biggest concern is running out of money. This is the case for people with an average amount of savings to those with a large nest egg. I, Nolan, recently met Tom Hegna, author of “Retirement Income Masters,” and he described it best about the fear of running out of money. He said, ‘Imagine being in a car in the desert, knowing that you don’t have enough gas to make it to a gas station.’ The panic isn’t just the moment the person runs out of gas; it is watching the gas gauge slowly go down. In my experience, avoiding retirement mistakes is the best way to stay on track and have a long and enjoyable retirement.
The first mistake people can make is choosing the wrong options with Social Security and pensions. The person who waits to draw social security at age 70 versus taking it right away at age 62 will receive 74 percent more actual dollars by waiting. Thanks to advancements in technology, software is available to help a family decide on when to start drawing social security benefits. Some pension plans offer a lump sum payout. This is a one-time payment instead of a lifetime of monthly payments from an employer. This can seem like a tempting offer to take the cash and run. But watch out: Spend the money too quickly or get lousy investment returns and the money can run out.
Focusing too much on growth can be a mistake. As of June 29. the stock market has gone exactly 1,000 days without a 10 percent or greater drop in the index, the fifth-longest stretch without a double-digit pullback in the last 50 years (source: BTN Research). We love it too when the stock market grows and hope it continues to grow for a long time to come. Just remember the stock market goes up and it goes down. Since the market is close to or at an all-time high, now is a good time to have safety nets in place before another crash occurs. Avoid the emotional urge to get greedy with investments. Look for not only good growth but great income options as well.
Not understanding taxes on retirement accounts can be a costly mistake. Three areas to focus on are company stock in a 401(k), lifetime taxes on withdrawals and income taxes at death. I recently met with a retiree who about a year ago moved his 401(k) into an IRA with a low-cost online investment firm, of which 100 percent of money was invested into highly appreciated company stock. Little did he know, nor was he advised, that prior to moving his company stock in his 401(k) plan he could have used a tax strategy called Net Unrealized Appreciation. Based upon talking with an accountant, this could have saved him about $70,000 in taxes!
The next mistake is not addressing the taxes that will be paid over the lifetime of withdrawals of an IRA account owner. Many people want to delay as long as possible paying taxes on their retirement accounts. Sometimes an account owner will wait until they are forced to make withdrawals through required minimum distributions starting at 70 ½. We see two potential problems with this. If the account owner is successful in investing, they will now pay more taxes due to the larger balance. Also, with massive amounts of debts and trillions in unfunded liabilities tax rates could skyrocket in the future. This double whammy affect could be higher taxes on a higher place. The less an investor pays in taxes the longer the money can last.
The last area of taxation typically comes at the death of the second spouse. When money is left in a traditional retirement account to children, normally income taxes are due. If you have a retirement account, income taxes are due. New rules allow the account owner to set up what is called a multi-generational retirement account also known as a Stretch IRA. Using this strategy, a nonspousal beneficiary now has two options: cash out the account and pay the taxes, just like before, or stretch out the taxes over their lifetime, paying taxes yearly only on the required minimum distributions. This strategy, if used correctly, could create lifetime income for more than one generation.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550