13 Retirement Mistakes to Avoid
Baby boomers are fleeing the workforce in droves, with nearly a million older Americans retiring in the last quarter of 2016 alone. As the end of their earning years draws closer, seniors and soon-to-be retirees should take care to avoid the most dangerous retirement pitfalls. A financially stable life in retirement depends on knowing what not to do with your money and assets as your career winds down.
The Internal Revenue Service allows larger contributions to tax-privileged retirement accounts for taxpayers 50 and older. When taxpayers hit the big 5-0, they can try to make up for lost investing time by stuffing as much into their retirement accounts as possible. In 2017, the maximum allowable contribution to an Individual Retirement Arrangement, or IRA, jumps to $6,500 a year from $5,500 for older Americans.
If you own a TV, you've probably seen commercials promising easy money through reverse mortgages. A reverse mortgage can benefit some senior homeowners in some situations, but it also drains a home's equity while accruing a debt that charges interest. Reverse mortgages are often sold on commission by salespeople who downplay the high fees, complicated rules, potential threat to government benefits, and risk of losing your home.
There is no such thing as a risk-free investment, but those with the potential for the biggest gains usually come with higher risks. Young investors can afford to wait out market downturns and other major swings. Retirees can't. When approaching retirement, many experts recommend that investors convert a greater portion of their savings to less lucrative but less volatile investment vehicles like bonds.
It's almost never a good idea to make early withdrawals from 401(k) and IRA retirement accounts, which can trigger stiff tax penalties. But many retirees do exactly that and have to make do with less. Although some 401(k)s have loan repayment programs and Roth IRAs allow withdrawal of certain funds without penalty, experts recommend these options only as a last resort in true emergencies.
Many Americans continue working after age 65. If they leave their jobs -- and their employer-based insurance -- they're eligible for Medicare. They must, however, sign up within eight months of ending their employment. Failure to meet this deadline could result in a loss of eligibility, lack of coverage, and/or a 10 percent late-enrollment penalty.
Older Americans can save money by annually re-evaluating their prescription drug benefits -- Medicare Part D -- during open enrollment, which takes place every year between October and December. Many, however, leave their plans on autopilot and don't account for frequent price changes and premium hikes. By failing to adjust, seniors end up paying more all year long.
Many empty nesters sell their homes and downsize in retirement. Homeowners can reap a tax-free profit of up to $250,000 -- $500,000 for married couples -- if they understand the IRS rules. The tax exclusion requires the seller to have owned the home for two of the five years before the sale. There are also other requirements regarding tax-filing status and timing, which pre-retirees should understand before listing a house.
There are several ways to cover the cost of a stay in a nursing home or other long-term-care facility without paying out of pocket. Long-term-care insurance is one example. Some people may qualify for Medicaid coverage even if they were denied in the past. Others may be able to use a life insurance policy to pay for assisted living.
Many people who enter assisted-living facilities must pay out of pocket until their assets are reduced enough to qualify for state-financed Medicaid. States can attempt to recoup money paid out through Medicaid by putting a lien on the beneficiary's home or by confiscating other assets after the beneficiary dies. Medicare.gov outlines ways to transfer and protect those assets from the reach of the state.
Most health insurance plans don't cover room and board in long-term-care and nursing facilities. However, people entering such facilities still need insurance to help pay for medical supplies, doctors' care, and hospital services while they're in the nursing home and will have to pay out of pocket if they've dropped their coverage.
Americans are eligible to apply for Social Security benefits when they turn 62, but they get 25 percent more if they wait until 66. If they wait until they turn 70 to apply, they get 32 percent more. For Americans who have the means, it pays to wait.
Seniors are particularly vulnerable to financial fraud, and they are common targets for scam artists. Experts recommend that seniors always maintain control of their money and assets and never invest in anything they don't understand. They should also involve a financial adviser or family member in any unfamiliar transaction. Finally, they should remember that many scam artists are polite and well-mannered "salespeople" who prey on their fears and offer solutions.
The single biggest financial regret older Americans report is not saving for retirement earlier, according to a recent Bankrate survey. Put away $300 a month starting at 25, and you'll have $450,000 at age 65 (assuming 5 percent interest). Wait until you're 35, and the nest egg shrinks to $250,000. Although there's little that older Americans can do to catch up, they can pass on this wisdom as inheritance to their kids and grandkids as early as possible.