11/19/2012 8:15 PM ET|
7 moves new retirees will regret
The transition from the world of work involves some details you may not have fully considered. Don't let these possible missteps derail your plans.
It can be difficult to know when you are truly ready to retire. Even if you are relatively certain you have enough savings to last the rest of your life, there is still plenty that could go wrong. Here are some potential mistakes to avoid as you transition into retirement:
Moving to a place where you don't know anyone. Once you're no longer tied to a job, it's tempting to move to a location with better weather or more fun things to do. In some cases, you can even significantly reduce your retirement expenses by moving to a place with more affordable housing and a lower cost of living. But moving away from your friends and family and your support system of associates, including everything from a great dentist to a car mechanic you can trust, can be detrimental to your retirement. It's difficult to start from scratch and it can take years to build a network of people who can help when you need it.
Quitting before you are vested in your retirement plan. You may not get to keep all of your employer's 401k contributions, exercise stock options or qualify for traditional pension payouts until you are fully vested in the retirement plan. Before you turn in your letter of resignation, look up the exact date you will become fully vested in the plan. If it's a matter of weeks or months, sticking around until you qualify for more lucrative benefits could significantly improve your retirement finances. "If you are close to an anniversary date or if you have any stock options that are about to vest, you don't want to leave right before you are about to vest and lose out on money," says Laura Barnett Lion, a certified financial planner and the president of Barnett Financial in Austin, Texas.
Retiring before you set up health insurance. Medicare coverage begins when you turn 65. If you want to retire before then, you'll need to find alternative health insurance coverage. Some employers offer retiree health insurance plans to former employees. If your company had at least 20 employees, you can also buy back into your former employer's group health insurance plan using COBRA continuation coverage, typically for up to 18 months. Other health insurance options for early retirees include joining a spouse's health plan, purchasing individual insurance or seeing if you qualify for state insurance pools. Some organizations you belong to or part-time jobs may also provide health insurance. "If you are younger than 65 and you are retiring from a company plan, you want to pay special attention if you have any health issues," says Christopher Rhim, a certified financial planner for Green View Advisors in Washington, D.C. and Norwich, Vt. "Know what your benefits are and compare this to any new plan under consideration." Beginning in 2014, young retirees will be able to purchase health insurance through insurance exchanges, with tax credits for those with low and moderate incomes.
Thinking your health will hold out forever. Many new retirees are healthy and energetic, but it's important that they plan for a day when they may not be. Proximity to medical care becomes increasingly important as you age. You also need to think about the possibility that you might require long-term care or extra household help from caregivers or family members. It's a good idea to put your medical requests in writing and to designate someone to make medical decisions for you if you cannot.
Taking Social Security too soon. You can sign up for Social Security beginning at age 62, but that doesn't necessarily mean you should. If you elect to begin receiving payments at 62, you will receive lower monthly payments than you would if you waited. "If you are retiring before your full retirement age, which is 66 for most baby boomers, and you are planning on taking Social Security before 66 at a discount, that can have a substantial negative impact on your retirement finances," says Terry Seaton, a certified financial planner for Seaton Financial Advisors in St. Augustine, Fla. "You can wait even after 66 up to 70, and it increases each year." Monthly Social Security payouts grow for each month you delay claiming up until age 70.
Forgetting to take required minimum distributions. Withdrawals from 401k's and traditional individual retirement accounts become required at age 70 1/2. People who fail to withdraw the correct amount face a 50% tax penalty in addition to the regular income tax due on the amount that should have been withdrawn.
Spending too much on travel and new hobbies. Some expenses will decrease in retirement, such as commuting costs and workplace attire. But new costs may take their place or even surpass them. Travel can become a huge new retirement expense, and some new hobbies might also come with significant costs. Some retirees end up spending more on entertainment simply because they have more time for it. You may find yourself dining out more to get out of the house or connect with other people. "When you have time on your hands, most people are fairly creative in finding ways to spend money. They play more golf and they go see the grandkids more often," says Seaton. "Find out how you want to spend your time in retirement, and find out what it's going to cost you."
More from U.S. News & World Report:
- 7 ways to retire with $1 million
- 12 ways to increase your Social Security payments
- 6 ways the 'fiscal cliff' could affect seniors
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My professional advisor also recommends taking Social Security as soon as you are able. The break-even point for waiting until 65 is into your 80's. At that point, will you still be around? Maybe. Will you still be healthy enough to enjoy the money as much as you can in your 60's and 70's? Probably not. Will Social Security still be around? Who knows?
Take it when you can get it and don't look back.
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