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You spend decades stockpiling money for retirement, sacrificing impulse buys today for financial security down the road. But your ability to make ends meet when you stop producing a paycheck has more to do with the decisions you make in your 60s than you may think.
Indeed, even a few false moves on the off-ramp to retirement can potentially put your lifestyle at risk.
Some of the biggest financial blunders you can make in your 60s include:
- Selling stocks when the market is down.
- Ignoring inflation.
- Forgetting the tax man.
- Underestimating health care costs.
- Retiring too soon.
- Claiming Social Security too early.
- Putting your kids first.
Selling stocks when the market is down
Selling your stocks when the market is down is never ideal, but it packs an oversized punch during retirement. Why? Retirees no longer produce an income to replenish their losses.
Consider: If you withdraw 4 percent from your retirement account during a market decline when your portfolio is already down 10 percent, the value of your stock portfolio that year will drop by 14 percent.
The financial hit is greater still if you experience a bear market early in your retirement and are forced to sell stocks to generate income. Taking withdrawals in your 60s when your portfolio is down can increase the likelihood that you will deplete your savings prematurely. The reason: Future compounded earnings will be based on a smaller account value — a financial phenomenon known as sequence of returns risk. (Learn more: Beware retirement’s overlooked risk: Sequence of returns)
One solution? Have a cash stash (or several buckets of liquid savings) available during retirement from which you can draw during market downturns, giving your portfolio time to recover.
Ignoring inflation
Inflation, or the gradual increase in the cost of goods and services, is an insidious thief, robbing retirees of purchasing power over time.
Historically, inflation has risen from 2 percent to 3 percent per year.1According to Forbes, that means a 65-year-old retiree who needs roughly $50,000 of income to cover today’s expenses would need to spend roughly $80,000 in 20 years to maintain their purchasing power.2
But the inflation rate recently jumped to twice the historical average (6 percent or higher), putting more retirees at risk of outliving their savings.
A 2022 MassMutual survey found that more than half (54 percent) of pre-retirees ages 55 to 65 were unclear whether their retirement income plans accounted for either inflation or market volatility.
Keep in mind that Social Security benefits may include cost-of living-adjustments, but any pensions or fixed annuity payments you receive may not. (Learn more: Is your retirement portfolio inflation ready?)
“Your best long-term hedge against inflation is stocks,” said Joseph Leary, a MassMutual financial professional in Allentown, Pennsylvania, noting that many retirees are wise to keep a portion of their nest egg invested for growth. “Companies with pricing power can typically pass those price increases along to consumers so that they can still make payroll and meet their dividend.”
Forgetting the tax man
Many still saving for retirement in their 60s fail to appreciate the tax implications of future withdrawals from their retirement accounts.
Retirees pay ordinary income tax on every dollar distributed from their pretax accounts, including their 401(k) and traditional IRA. That includes both contributions and earnings.
The government requires you to begin taking required minimum distributions (RMDs) from your pretax accounts every year beginning at age 73. That age limit climbs to 75 effective January 1, 2033. (Learn more: Turning 73? Required minimum distributions explained)
The RMD is based on your age and account value. If your pretax savings are sizable, your RMD may be large enough to bump you into a higher tax bracket than you might expect during retirement.
“Taxes are a missed opportunity for many retirement savers,” said Leary. “Projections and planning can potentially tell you whether you would be better off contributing to a Roth IRA today, instead of a 401(k) or traditional IRA, to lower your taxable income down the road.”
If your income is too high to contribute directly to a Roth IRA, he said, you might consider doing a Roth IRA conversion instead. Roth IRA conversions have no income restrictions. Those who convert their savings to an after-tax Roth IRA must pay ordinary income tax on the amount converted up front, but the earnings grow tax free. And, you are never required to take minimum distributions from a Roth IRA, making them a potentially valuable estate planning tool.
Underestimating health care expenses
Health care expenses are the biggest unknown in retirement planning. And many on the cusp of retirement underestimate how much they’ll need.
Your actual medical costs will reflect your age, gender, marital status, and health status, but industry estimates offer guidance.
According to Fidelity Investments, the average couple who retires today at age 65 with traditional Medicare coverage can expect to spend roughly $315,000 (after tax) during retirement on copays, deductibles, insurance premiums, and other expenses not covered by insurance.3 That does not include costs associated with long-term care (LTC), the median annual cost of which was $108,000 per year in 2021 for a private room at a nursing home facility.
If you retire before you reach Medicare eligibility at age 65, you will need additional savings to pay for private health insurance — unless your spouse has health insurance coverage through their employer that you can join. Private health insurance can be cost prohibitive or even unattainable in the pre-retirement years, especially if you have underlying health conditions. (Learn more: Retiring early? A guide to understanding your health insurance options)
Insurance protection products can potentially help preserve your assets.
“If one does not have disability income insurance or long-term care coverage factored into their retirement plan, one might get hit with the cost of treatments, hospital bills, and doctor appointment bills,” said Laura Schroeder, a financial professional with Lenox Advisors in Los Angeles. “This can be overwhelmingly expensive. Those who do not strategically plan for this can quickly drain their savings.”
Retiring too soon
Many dream of an early retirement and that may be possible, but it requires careful planning and plenty of cash.
Remember that you generally can’t withdraw money from your tax-deferred retirement accounts, such as your traditional IRA or 401(k), until age 59 ½ without incurring taxes plus a hefty 10 percent penalty.
Thus, you’ll need enough savings to cover your living expenses until Medicare, Social Security, and your retirement accounts become accessible. That may come from personal savings, extra income from a side job, an annuity, or even cash value life insurance, which can be used during your lifetime for any reason including supplemental retirement income.5
If you don’t have extra savings set aside and are forced to tap your retirement savings too soon, you run a far greater risk of outliving your assets. (Learn more: A checklist for early retirement)
Regardless of when you retire, Leary recommends stress testing your budget before you leave your job so that you can spot opportunities to save and are certain you can make ends meet.
Claiming Social Security too early
It’s tempting to claim Social Security benefits at the earliest opportunity, which is at age 62. But for most people who expect to live a long life and don’t need their benefit check early, it’s a mistake.
Why? You permanently reduce your monthly benefit by claiming Social Security before your full retirement age, which is from 65 to 67 depending on your birth year.
Most financial professionals recommend waiting (if you have the means) until your “full retirement age,” at which point you can collect the full benefit to which you are entitled. (Related: Filing for Social Security benefits)
Better yet, those who delay benefits beyond their full retirement age can permanently increase the amount of their monthly benefit — by 8 percent per year for each year you delay. The incentive to delay any further disappears at age 70.
Delaying Social Security benefits remains the best way to give yourself a guaranteed raise in retirement.
Putting your kids first
We all want to give our kids the best, but when it comes at the cost of our own financial well-being, we’re doing no one any favors.
That’s especially true for parents who overextend themselves and take on debt (or borrow from their retirement account) to help their kids pay for college or buy a house.
Remember: The best gift we can give our children is to provide for our own financial security — so we don’t become a burden to them as we age.
Parents who do have extra income to help their kids with college should be sure that they are saving smart, said Schroeder.
If you’re not convinced your child will choose to attend college, she said, consider saving some money into a tax-favored 529 college savings plan, but put the rest into a whole life insurance policy that builds cash value. The primary purpose of life insurance is to provide a death benefit to your heirs, but the cash value that permanent policies (like whole life) accrue can be used tax free during your lifetime for any reason, penalty free, including to help cover the cost of tuition or supplement retirement savings.6
Of course, parents can help their kids in countless ways that do not involve draining their personal savings. They can teach them how to create a budget, compare loan offers, and minimize debt. And they can help their kids manage student loans effectively. (Learn more: Six ways to cut college costs in half )
Conclusion
Retirement savers in their 60s should proceed with caution. The choices they make in the home stretch have an outsized effect on their future financial well-being.
To set themselves up for success, and to ensure they don’t fall prey to some of the most common money mistakes, pre-retirees often turn to a financial professional for advice.
Discover more from MassMutual…
4 reasons why maxing out your 401(k) may not be enough
Borrowing from your 401(k): The risks
Need a financial professional? Find one here
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1 Macrotrends, “U.S. Inflation Rate 1960 – 2023.”
2 Forbes, “How Inflation Affects Your Retirement Plans,” July 18, 2022.
3 Fidelity Investments, “How to plan for rising health care costs,” April 2023.
4 Genworth, “Cost of Care Survey,” June 2, 2022.
5 Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit. It also increases the chance the policy may lapse and could result in a tax liability if the policy terminates before the death of the insured.
6 Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit. It also increases the chance the policy may lapse and could result in a tax liability if the policy terminates before the death of the insured.